Part of being an entrepreneur is taking on additional financial responsibilities and risks for the benefit of growing your business. Imagine you're an established individual with property, assets, and money. If you invest in your own business, to what extent are those things protected should the venture fail?
The answer lies in how you structured your business and which entity you chose. The common types are:
- Sole proprietorship
- Partnerships
- Limited Liability Companies (LLC)
- C Corporations
- S Corporations
Which entity is right depends on your acceptable level of personal risk, tax benefits, your potential for future investors, and the cost of operating that entity.
The LLC
An LLC has pass-through taxation — owners (members) take their profits and pay taxes through their income taxes. An LLC also includes limited liability: liability will not exceed the amount of money that went into the company, and there's a clear distinction between company assets and personal assets.
Why choose an LLC?
The most common type is the single-member LLC, where the owner is solely responsible for the business's finances, such as taxes and debt. Picture your assets on one side and your business on the other — the LLC sits between them. Should your business face civil lawsuits or bankruptcy, your personal assets cannot be taken by the court or creditors.
Questions to ask your attorney
As you create an entity, ask how long the LLC lasts. You also intend for your business to grow — so ask how taking on a partner affects your LLC, and what happens to your entity status if you sell. Answers vary by state, so work with your attorney to devise the plan that best protects you and your interests. The higher the risk your business faces, the more you want to ensure your personal property isn't subject to that same risk.
At Maxwell Dunn, we're a business advisory firm — our legal advice and solutions are based on what's best for you and your business over the long term. If you plan on starting a business, contact us to review your options and choose the right entity.
Talk it through with us
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