If you are a small business owner, what is the best way to protect yourself and your assets?
By forming a strong separate legal entity.
There are many options to consider when forming a small business; each has its pluses and minuses. Among your choices are a C-corporation, a closed corporation, a limited liability company (LLC), a limited liability partnership (LLP), a general partnership, or a limited partnership. The factors taken into account when deciding which entity is best suited for your needs are liability protection, taxes, and management and control of the business.
Here is a brief overview of each entity:
- Sole Proprietorship. This is a business owned by one person. Owners sometimes choose to operate as a sole proprietor, and in other cases they arrive to that place by default. If they start a business and don’t choose an entity, they are deemed a sole proprietor. The benefit to this type of entity is that you retain complete control. However because you have no corporate shield, you are liable personally for anything that happens and you are taxed as an individual. Often a fictitious business name filing may be required by your local county in order to do business. Check out your local Secretary of State business portal to see what the requirements are for doing business. Here are a few state sites, which give you an idea of what a state business portal may offer: California Secretary of State: http://tinyurl.com/yfjmxvc; Nevada Secretary of State: http://tinyurl.com/2bb7ykc; New York Secretary of State: https://www.dos.ny.gov/corps/bus_entity_search.html.
- A general partnership (GP) is created—for profit—by two or more people, known as partners. The owners are general partners, who manage the day-to-day affairs. Each partner assumes personal responsibility for the liabilities of the business. This form of entity should ALWAYS be evidenced by a written agreement. A competent small business lawyer can assist you. Here is a little more information about GPs in California: http://tinyurl.com/27uusvx; New York: https://www.dos.ny.gov/corps/bus_forms.html ; Illinois: http://tinyurl.com/6zf8n.
- A limited partnership (LP) is a partnership, which limits the liability of the non-general partners, sometimes called the passive partners, for any debts beyond their investment. The downside is that they have no say in the management of the business. A limited partnership requires a written agreement between the general partners and the limited partners, and often requires a filing with the Secretary of State. A competent business lawyer can assist you in preparing the necessary documents. If I can be of assistance, feel free to contact me at email@example.com or check out my business lawyer web site: http://tinyurl.com/28gcd85
In the next post, we’ll explore C-Corporations, LLCs, LLPs, and Closed Corporations.