Why You Need A Business Entity

When starting or expanding a business, many owners wonder whether they should create a business unit and, if so, which one they should use. There is a lot of information and "pitches" being made on the Internet about the benefits of some entities versus others. However, while you avoid criticism, the primary reason for forming a business entity is to create protection from personal liability arising from your business activities. It is well established that up to eighty percent of businesses will fail within their first two years. Many of these businesses, and probably you, carry a high level of personal risk to their owners. If you are not using the correct unit for your particular business, you will be personally liable if the business fails. Do you want to expose your home, car and other assets? How about property owned by your spouse or their paycheck from a regular job? Choosing the right unit for your business prevents such nightmares from occurring. More importantly, you can sleep through the night knowing that the worst thing that can happen is to lose your investment in the business, not your home. Business Structures Many business structure options exist in the modern corporate world. The following is a brief description of the most common business structures. Corporations come in two basic forms, a "C" corporation and an "S" corporation. There are many differences, but the central one is the tax issue. In essence, "C" corporations are taxed on their revenue and then any money you withdraw from the corporation is taxed separately. An "S" corporation passes "all taxes" to shareholders along with the information being reported on your personal tax return. Regardless of tax classification, a corporation is considered an independent entity from a legal point of view. This independent position acts as a shield between the activities of the business and your personal assets. As a practical example, Kmart recently filed to bankruptcy. Individual shareholders were not required to file bankruptcy and lost nothing other than their investment in the company's stock. Forming a corporation and using it for your business activities will have the same effect, if the business fails, your personal assets will not be wiped out. Limited Liability Company A limited liability company, or "LLC" as it is better known, was a very popular entity choice in the early 1990s. LLC, are similar to corporations, but can be taxed as partnerships. In California, an LLC can have one or two owners. Regardless of the number, these owners hold the legal title of "member". An LLC provides a shield for your personal assets, just like a corporation. Partnership, In my opinion, it is better for the death of a young child to remain in a partnership. Unfortunately, many business owners form partnerships and are not even aware of it. This is when they go into business with another person. If no business entity is formed, the law treats the business as a partnership and treats it accordingly. Partnerships are dangerous for one primary reason: A partnership offers no protection from liability and, in many ways, invites personal liability. Under well-established law, most partnerships are classified as "common." It simply means that all the partners are contributing in the administration and running of the partnership business. This classification can have dire consequences. In a general partnership, each partner is jointly liable for the debts of another partner arising out of the business. For example, you and your partner go to a business dinner with a client. Your partner has a drink and then some more. He meets with an accident on his way home. Each participant is liable for damages claimed by the injured. That means you! Even if you're not in a car, don't rent a car, never see a car or drink! Partnership is a recipe for disaster.    Stay away from them whenever possible. Limited Partnership ["LP"] is perhaps the most misunderstood business entity. A limited partnership is similar to a general partnership, but allows multiple partners to limit their liability by being limited partners. It is important to note that these limited partners are only limited to making capital (cash, materials, equipment) contributions to the partnership. They may not be actively involved in running the business. If they are, they lose any protection from partnership debts. Many limited partnerships end disastrously. If you are married to the idea of ​​pursuing a limited partnership, you should do so in combination with corporations. That particular strategy is well beyond the scope of this article, but feel free to contact me if you'd like to pursue a limited partnership. Business owners should protect themselves by creating institutions for their business activities.