You’ve got a million-dollar idea, you’ve acquired the start-up funds and now you’re ready to get the gears turning to establish your new business. But wait — there’s one major factor you may not have considered.
The legal structure you choose to establish for your business has an enormous impact on the way it operates. If you have concerns about facing personal liability, it’s important to choose wisely.
If your new business will stretch your funds, you may not be able to take on losses that personal liability could create. If you can’t afford the risk, a corporation or an LLC may be the best structure for your business.
Liability for a corporation
A corporation is owned by shareholders — not founders. This allows founders to avoid personal liability and protect personal assets from debt collection. The corporation itself could be held liable for debt or injuries, but the founders may not be personally responsible.
Different types of corporations can impact the amount of personal tax liability the business may face. For example, with a Subchapter corporation model, shareholders hold some tax responsibility for income and losses, reducing the federal taxes on the business.
Liability for an LLC
Limited liability companies (LLCs) include the same liability benefits as the “S” corporation model. The tax responsibility that is transferred to owners reduces the amount of taxes on the business.
Meanwhile, founders, members and/or owners of an LLC can still place personal liabilities on the business, rather than their person. And, in contrast to corporation shareholders, they can participate in business operation decisions.
Cross these models off your list
Self-employment, a proprietorship and partnership business models do not protect founders from personal liability. However, if you have an insurance policy that can cover potential liability issues, these models have better tax and reporting benefits. If you won’t be able to handle financial obligations of the business that land on your shoulders, these models should be crossed off of your list.
Ask for advice
If you aren’t sure whether the tax benefits of a certain business structure may outweigh the personal liability you may face, the best resource to consult is a lawyer. An attorney can assess your finances, insurance policy and other business resources to help you come to a conclusion about which legal structure may be best for your new business.