Blog | Entrepreneurship

Select the Best Entity for Your Personal Strategy

The Good, Bad, and Ugly for Asset Protection

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When you start a business it’s easy to get caught up in things like deciding your business name, creating a logo, or picking your brand colors. But none of this is nearly as important as choosing how to set up your entity. One of the biggest, and most costly mistakes that an entrepreneur can make is choosing the wrong business formation.

First, what does the word “entity” mean? The word entity refers to an organization which has a legal separation from its members. This is the first step to organizing your business to limit your liability.

Here are the six ways you can organize your business:

  1. C Corporation
  2. S Corporation
  3. Limited Liability Company (LLC)
  4. Limited Partnership (LP)
  5. General Partnership
  6. Sole Proprietorship

Now, for the Good, the Bad, and the Ugly.

The Good

Each entity type has its own advantages and specific uses. Each one is utilized by the rich and the knowledgeable in their business and personal financial affairs.

Limited Liability Company (LLC) - is a good entity to use in certain situations. It provides the limited liability protection of a corporation and the flow-through taxation of a partnership, some refer to the LLC as an incorporated partnership.

Limited Partnership (LP) - is similar to a general partnership with the exception that it has two types of partners. The first type is a general partner who is responsible for managing the partnership. The second type has a limited partner and by definition, he or she is limited to his contribution of capital to the partnership and may not be actively involved in the business of the partnership.

Corporations - are entities with a life of their own. It has its own name, business purpose, and tax identity with the IRS. As such, it is responsible for the activities of the business. In this way, the owners, or shareholders are protected. The owner’s liability is limited to the monies they used to start the corporation, not all of their other personal assets. If an entity is to be sued it is the corporation, not the individuals behind the legal entity.

The Bad

Sole Proprietorship - is doing business in your name. By operating as a sole proprietorship you have unlimited liability for debts, claims, and obligations of the business. This unlimited liability means that your house and savings and personal assets are exposed to the claim of others.

The Ugly

General Partnership - is twice as bad as a sole proprietorship because you have twice the personal exposure. Whenever two or more persons agree to share profits and losses a partnership has been formed. Even if you never sign a partnership agreement, state law provides that under such circumstances you have formed a general partnership. Each partner is liable for the debts and obligations incurred by all the general partners. And remember, just as with a sole proprietorship, your personal assets are at risk in a general partnership.

My primary purpose as an attorney is to make sure my clients are protected from claims when they set up their entity. I enjoy helping entrepreneurs and business owners make money, provide for their families and employees, and secure a stable future.

Whether you are concerned about protecting your business, preventing business claims from affecting your personal assets, or planning for the distribution of your assets to your heirs, you need to know how to limit liability. And as Robert Kiyosaki always says, you don’t have to decide alone. Use an attorney or other professional advisor, like an accountant, to decide.

To learn how the best way to set up your business, and limit your liability, get my book “Start Your Own Corporation”.

Original publish date: August 15, 2018

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