Tony writes: “What do I do about protecting my assets when I am being sued? What are the pros and cons I should be looking out for? Please point me in the right direction.”
When starting a business in the United States, you must decide what form of business entity to establish.
The most common forms of business are the sole proprietorship, partnership, corporation, and S corporation. A Limited Liability Company (LLC) is a relatively new business structure allowed by state statute. Legal and tax considerations enter into selecting a business structure.
Sole proprietorship. The business is owned and controlled by one person. This person alone receives the profits and bears the losses from the business, and this person alone is responsible for the debts and obligations of the business.
General Partnership. The business is owned by two or more persons who associate to carry on the business as a partnership. Partnerships have specific attributes, which are defined by statute. All partners in a general partnership share equally in the right, and responsibility, to manage the business, and each partner is responsible for all the debts and obligations of the business.
Limited Partnership. A limited partnership is a type of partnership in which limited partners share in the partnership’s liability only up to the amount of their investment in the limited partnership. A limited partnership must have at least one general partner and one limited partner. The general partner is responsible for day-to-day management of the limited partnership, and is responsible for the debts and obligations of the limited partnership. The limited partner, in exchange for limited liability, is usually not involved in the day-to-day management and control of the business.
Corporation. A corporation is a separate legal entity. It is owned by one or more shareholders. The shareholders elect a board of directors which is responsible for management and control of the corporation. Because the corporation is a separate legal entity, it is responsible for the debts and obligations of the business. In most cases, shareholders are insulated from claims against the corporation. An “S corporation” is a corporation that elects to be treated under Subchapter S of the Internal Revenue Code. In most cases, S corporation shareholders, rather than the corporation itself, are taxed on the profits of the corporation.
Limited Liability Company. A limited liability company (LLC) is a form of business organization that is designed to combine the tax treatment of a sole proprietorship or partnership with the limited liability characteristics of a corporation. A limited liability company may have one or more members.
With the exception of sole proprietorships, all of the above forms of organization are established by statute. Specific forms must be filed with your Secretary of State, and in most cases the business organization must obtain federal and state tax ID numbers. There also may be constraints on changing from one form of organization to another.
For these reasons, decisions regarding your legal liability depend upon how you set up your business and should be made with the assistance of knowledgeable legal counsel.
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