What are common forms of business ownership that reduce personal liability?
Starting a business is a difficult decision filled with many choices. It is a complicated process that involves everything from choosing a name to deciding whether to offer stocks. One of the first decisions you have to make as a business owner is about the legal structure of your business. Whether you choose a partnership, corporation or something in between, the structure should advance your business objectives.
General and Limited Liability Partnerships
A general partnership is one where multiple owners come together to share profits and liability and are able to divide them any way they choose. They are easy and inexpensive to create and rarely require any specific filings. Other than the sole proprietorship, or single owner structure, this provides the least amount of personal liability protection. Owners/Partners are personally liable for business debts. The assets of any partners can be used to cover business liabilities regardless of who incurred the liabilities. There is no limit on liability.
There are also limited liability partnerships (LLP) which provide additional liability protection. This structure protects some partners from specific liabilities of the others. This is attractive to professional groups like doctors and lawyers because the partners will not be responsible for the malpractice of another partner. However, any liability the business incurs as an entity will impact all the partners.
Limited Liability Company (LLC)
This type of company is more expensive and time consuming to create, but it also provides additional protection. Owners must register an LLC with the Secretary of State and pay the customary fees. They must also file with the IRS and have the LLC be taxed as a partnership or corporation. One of the benefits of this structure is that profits and losses can be allocated to reflect different levels of ownership. Another is the owners have limited personal liability for the business’ debts. This is true even if the owner is one of the managers.
Understanding the Corporation Business Structure
A corporation is the most complex and expensive business structure. It has multiple types of levels of management and ownership. It also provides the greatest amount of liability protection. Corporations are separate legal and tax entities from their owners. Owners have little to no personal liability for the business’ debts.