For many of us, starting a business comes with a ton of challenges. How will we make enough to cover our expenses? Where will we find new clients? How will we clone ourselves to get the work done? There’s so much going on, we often overlook one essential task on our to-do list: to protect our personal assets. Let me explain.
Sole proprietorships are the most popular business structure. They outnumber corporations or LLCs by about 19 to 1. And yet, a sole proprietorship is the single type of business entity that leaves you completely vulnerable as a business owner.
Under a sole proprietorship, the government doesn’t see a difference between your business and you as the owner of the business; as a result, you can be personally liable for any debts or expenses your business incurs. So if your business is sued, you will personally be responsible for paying any settlement or debt, and your personal assets, like your house, your car, your retirement and such, might be jeopardized in the situation.
If you decide to close your business or file bankruptcy, again, you’ll have vendors and businesses coming to claim what’s rightfully theirs. If your business doesn’t have the funds, they’ll take it from you.
Scary stuff, right?
Your Secret Weapon and Shield
Fortunately there are a few simple solutions to protecting yourself. One is the LLC. The Limited Liability Company separates you as the owner from your business. Your assets cannot be seized on behalf of the company’s debts.
There are other benefits to the LLC as well. You can keep your tax filing simple by “passing through” your company’s profits and losses to your personal taxes. You can also have members, and there are fewer restrictions to who can be one, compared to a corporation. In general the LLC is a little less formal than its big brother, the corporation.
But speaking of the corporation, there are also ample benefits there. You have the same protection of your personal assets, and you separate yourself as an entity. You can transfer ownership of a corporation, so if you decide down the road to sell your business, you can do so easily. Corporations have shareholders who own stocks in the corporation and with certain types of corporations such as the S corporation, there are restrictions on who and how many shareholders you can have.
Having a corporation also makes it easy to establish credit for your business separate from your personal credit. And if you want to raise money through investors, they’ll more than likely want you to be a corporation. Best of all, corporations pay lower taxes than individuals, and we could all use a little cost savings!
There are several types of corporations to consider, depending on your unique business needs. The majority of small businesses, however, opt for the S corporation, as it has many tax benefits for entrepreneurs:
So while you’re mired in managing your sales, accounting, and toilet paper supply, consider adding your business structure setup to your list of to dos. Once you file your paperwork with the state and get approved, you’ll breathe easier, knowing your personal assets are completely safe and your business is legal so you can focus on what you do best…innovating and growing your business!
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