Business Ownership Options

As a business owned by an individual, you can exist as a sole proprietorship, corporation or limited liability company (LLC). If your business has multiple owners you have the option of a general partnership, limited partnership, corporation or LLC. A limited liability company is another option, but for this discussion we are considering the LLC the same as a corporation for liability insulation.

Before analyzing the benefits of the corporation, let's study the sole proprietorship and general partnership by defining each. A sole proprietorship is a business that is not a formal legal entity, such as a corporation or a LLC. When you operate your business as a sole proprietorship and there is no legal separation between yourself and your business you are personally liable for every business debt.

It's difficult to imagine why so many small businesses function as sole proprietorships in these litigious times—especially when over 75% of small businesses fail within their first few years of formation. The owners of these unincorporated businesses risk every personal and family asset on the success of the venture and if the business fails they end up financially destroyed because the creditors of the business claim their personal assets, which could have been easily avoided.

Even more dangerous than the sole proprietorship is the general partnership. General partners are jointly and individually liable for every liability of the partnership and partners in a general partnership are exposed to greater loss if another general partner has insufficient assets to cover an obligation of the partnership. It is possible for one general partner to lose their wealth because of the actions or poor financial planning of another general partner. Accordingly, we never advise our clients to operate as a general partnership.

Both the sole proprietorship and general partnership have tremendous disadvantages because they create 'inside-out' liability and creditors can go outside the business to satisfy their claims directly from the owners' personal assets. Simultaneously, there is also 'outside-in' exposure in that an owner's personal creditors can seize business assets to satisfy the personal debts of an owner. Even worse, in a general partnership, a partner's personal creditors can force the liquidation of the partnership to claim that partner's equity in the business.

The key benefit of a corporation is that it is a separate legal entity from each of its shareholders. For this reason, a corporation (or a LLC) can protect your personal assets from any debts or lawsuits that could arise against your business in its day-to-day operation. Your corporation operates as is its own legal entity and as a shareholder, director or officer you are not liable for the debts or losses of the entity. If your corporation is sued or becomes insolvent, you risk only the loss of your investment in the business and all of your other assets remain safe and protected from the debts of the corporation.

It is not uncommon for a small business to begin as a sole proprietorship or general partnership and later become concerned about the exposure of personal assets only when the business is sued or suffers a reversal of fortune. If, as a sole proprietor or partner, you are sued while doing business, it is frequently impossible to convert the company into a corporation or LLC. It is possible, however, to avoid liability from future company lawsuits or debts by transferring the assets of the proprietorship or partnership into a corporation. In some cases, a corporation might eventually pay any debts for which you have personal liability.

No business is lawsuit-proof and therefore no business is too small to protect. Bigger companies have greater need for corporate protection because they are larger targets—but any business can suffer financial disaster from a variety of causes and therefore protection of its owners is essential.

PROTECT YOUR ASSETS TODAY!