So, you have taken that giant leap in your life and gone into business
for yourself. You have entered into a
lease agreement for office space, leased a copier/scanner/printer, purchased a
computer, hired staff, purchased liability insurance, hung out your shingle
advertising your business, generated many new customers for your product or
service, and you're ready to go, right?
Well, maybe not.
The fact is, in our highly litigious society, each of the simple acts
mentioned above not only builds your business, but each has some legal
ramifications that might someday negatively impact upon your business. If proper care is not taken at some point
during the life of the business, such claims might also impact your personal
assets if you have not taken the proper steps to protect those assets. One of the simplest, yet most effective, ways
to protect your personal assets from a misstep in your business life is to
either incorporate the business entity (as a “C” or “S” Corporation), or
establish a Limited Liability Company ("LLC”).
The creation of either of these business entities generally shields you
and your personal assets from exposure for liability incurred as a result of
your business activities. By adhering to
certain rules designed to keep your business and personal activities separate
(e.g.: not using business assets for personal items, or not co-mingling business
and personal banking matters), one can ensure that one's personal assets will
not be placed at risk due to exposure from liability for the acts of the
Corporation or LLC.
While
these business entities provide the advantage of limiting one's exposure to
personal liability, careful consideration of the business’ goals and objectives
must be given when determining whether to incorporate or create an LLC. For example, while a “C” Corporation
generally exposes income generated by the business to double taxation (once
when the income is generated and when the income is distributed to
shareholders), the LLC will generally be taxed once. In addition to tax ramifications, one must
also consider the goals and objectives of the business. The LLC allows more flexibility in
structuring the internal arrangements of the business, such as allocation of
income, gains, losses, deductions, etc, as well as more flexibility in
providing employee benefits. Both “C”
and “S” Corporations present more difficulty in structuring the allocation of
profits in a manner other than in proportion to ownership of shares in the
Corporation. Hence, the LLC might be the
preferred choice of business entity if these are the major concerns of the
business owner.
In
conclusion, the business owner – along with the legal advisor and accountant -
must consider the business’ goals and objectives, such as limiting tax
exposure, flexibility in allocation of profits, or the provision of employee
benefits, when determining the most effective form of the business entity.
However, proper selection of the business entity will provide the business
owner with protection of personal assets from liability claims, as well as
maximizing business profits.
This blog post is not considered to be legal advice, and is intended for educational purposes only.
For more information regarding any of the foregoing issues discussed above, please contact Robert F. Schillberg, Jr. (rschillberg@schillberglaw.com).
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