Which business structure should you choose to protect your business from legal liability?
If you own a business, you might be wondering which business structure is right for your company and what legal entities each structure affords. Your choices now can make a critical difference later. A sole proprietorship, for instance, has a single owner and doesn’t require a legal entity, but all liability falls on the owner, which can put your personal assets at risk if legal action is taken against your company and your business doesn’t have the funds to cover the amount. A partnership, on the other hand, has two owners. Again, a legal entity isn’t required, but a prudent business will acquire a limited partnership (LP) or a limited liability partnership (LLP) to protect personal assets.
Corporations have more options, and can be owned by one or more people. Legal entities for corporations vary, but are often costly to set up and require legal experts and advice when choosing the correct entities for maximum protection. Keep in mind that corporations are taxed differently than sole proprietors and partnerships. Limited Liability Companies (LLC) are the most common and protect the owner from personal liability. Their prevalence is due to a legal status similar to corporations when it comes to liability, but with the perks of more favorable tax benefits.
Should you acquire more than one entity for your business?
As a business owner, you might consider acquiring more than one legal entity, as a single entity often leaves a business open to unnecessary risks. This is especially important if you own more than one business or multiple assets within the same company. An unrelated business venture can be held accountable for a secondary business failure or a liability issue against a certain portion of your sole business venture. To avoid this, separate entities are in your best interest.
To further explain, it’s essential to understand the difference between safe and unsafe assets within your company. Cash assets are considered safe, as there is very little chance of liability. If you rent a building for your practice, however, and an accident happens, you could be liable. Having your cash assets and your rental property under two separate entities protects your safe assets from the risks associated with potential liabilities. That said, it’s important to note that having separate entities will take more from your bottom line, but the protection is worth it.
If you have any questions or want more information about the different business structures and legal entities appropriate for your venture, we at BWM Financial offer a free consultation and can help you acquire a trusted asset protection attorney to ensure your business is properly secured.
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Investment advice offered through Stratos Wealth Partners, Ltd., a Registered Investment Advisor DBA Brown Wealth Management. The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. Stratos Wealth Partners and its affiliates do not provide tax, legal or accounting advice. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. You should consult your own tax, legal and accounting advisors before engaging in any transaction.