| When starting a business, you have many decisions to | | | | officer. Very often they are also employees. |
| make; who to hire, where to locate, how to get | | | | Nonetheless, the law respects the different capacities, |
| customers and where to start. But, one of the most | | | | even if the same person occupies all three positions. |
| important and overlooked decisions is how to protect | | | | The key fact to remember is that the corporation is a |
| yourself. Going into business involves risk, but certain | | | | distinct and separate entity from its shareholders. This |
| risks can be avoided or, at least, minimized. One of the | | | | distinction is what provides for the protection. While the |
| easiest way to protect yourself is to choose the right | | | | corporation may be liable for corporate debts, the |
| business entity. There are four basic entities to choose | | | | shareholders are not. |
| from: sole proprietorship, partnership, corporation, and | | | | Unfortunately, the protection provided for by a |
| limited liability companies. | | | | corporation is not perfect. It can be given away, taken |
| A "sole proprietorship" offers no protection to the | | | | away or, simply, may not apply. For example, if your |
| owner, but is the simplest to set up. No papers need to | | | | corporation is paying your personal expenses, or |
| be filed, you simply start doing business. For a small | | | | corporate funds and personal funds are put in the |
| business with exposure to only minimal risk, a sole | | | | same account, the corporate protection is often |
| proprietorship may be acceptable. However since any | | | | revoked. Alternatively, a corporate owner may be |
| lawsuit puts your personal assets including your home, | | | | required to sign a personal guarantee in order to enter |
| car and bank accounts at risk, most individuals want to | | | | a lease or purchase contract. In these cases, the |
| consider a more formal business entity. If you do | | | | owner has given way his corporate protection. Finally, |
| conduct business as a sole proprietorship, but plan to | | | | corporations are run by people and people commit |
| do business under a different name, you need to file a | | | | wrongful acts. If you as the worker commit the |
| trade name application (sometimes called a "d/b/a" or | | | | wrongful act (improper construction, repairs, accidents, |
| "doing business as"). Filing is simply a matter of | | | | etc.) you will be personally responsible for the damage |
| completing a short form indicating your name, the trade | | | | you cause. However, if your employee commits the |
| name, business location and paying a small fee. Upon | | | | wrongful act, you are generally protected from |
| completion, you will be able to open a bank account in | | | | personal liability. Although not perfect, corporate entities |
| the trade name and conduct business in the trade | | | | provide one of the best levels of protection to the |
| name. | | | | business owner. |
| Another relatively informal business entity is a "general | | | | Once the decision to form a corporation is made, there |
| partnership." These entities do not require | | | | is a second decision to make: should you be a |
| documentation to come into formation. However, it is | | | | C-corporation or sub chapter S corporation. There is |
| always a good idea to document your relationship and | | | | no difference between C and S corporations for the |
| responsibilities with a written agreement. Like sole | | | | purposes of liability. It is merely a tax election which |
| proprietorships, general partnerships do not provide any | | | | can often save money. For a small business which has |
| asset protection. Additionally, they can create | | | | no intention of going public, an S election is very |
| unexpected exposure. For example if Partner A | | | | common and usually advantageous. You should |
| decides to make a purchase in the partnership name, | | | | consult with an attorney or tax expert to determine |
| Partner B is very likely to be personally responsible for | | | | whether the sub chapter S election is appropriate for |
| the debt even if he did not sign any documents. | | | | your situation. |
| A "limited partnership," requires at least one general | | | | The last entity to consider is the limited liability company |
| partner and at least one limited partnership. To properly | | | | or LLC. An LLC generally provides the same liability |
| form this type of entity, documentation must be filed | | | | protection as a corporation but can have different tax |
| with the secretary of state. A Limited Partnership is | | | | consequences. It is often said that an LLC is more |
| best used when someone intends to be a "silent | | | | flexible than a corporation. While there is some truth to |
| partner" or "money man". The general partner runs and | | | | this statement, the flexibility is often minimal. Moreover, |
| manages the business and remains personally liable. | | | | the tax liability can be more substantial than a sub |
| The limited partner cannot participate in daily | | | | chapter S corporation. It is important that you discuss |
| management and has no personal liability for | | | | your business needs with an attorney or accountant |
| partnership debts. However, the limited partner can | | | | before you elect to become an LLC. |
| lose his protection if he begins to manage the business. | | | | There is no best business entity for all situations, and |
| If he does, he becomes a general partner and | | | | there is no such thing as perfect protection. The best |
| exposes himself to personal liability. | | | | idea is to meet with an attorney and discuss your |
| Corporations provide personal liability protection for all | | | | business situation. You can then weigh the initial |
| of its shareholders. However, if certain formalities are | | | | expenses, long term costs and risks against your |
| not adhered to, the protection can be lost. The | | | | needs and make the best decision for you. As a final |
| corporate structure is simple: shareholders own the | | | | note, remember that you can lose your protection |
| business, shareholders elect a board of directors who | | | | under certain circumstance. The right business entity, a |
| oversee the long term objectives, and directors | | | | good lawyer and good accountant can help you avoid |
| appoint officers who run the daily business. In many | | | | problems before they occur. |
| small businesses the share holder is also a director and | | | | |