Are you starting a new business? Protect your personal assets!

The form of your business organization can have important liability and tax consequences. While many individuals prefer to do business under a sole proprietorship where the individual operating the small business, is the business and personally liable for all of the debts and claims against the business, we generally recommend that our clients consider establishing a limited liability company (LLC) or a corporation (C corporation or Sub Chapter S corporation).

In addition to taking steps to address the tax consequences that you would like to see in the future, an LLC or a corporation has the additional benefit of:

Showing the world that you are serious about your business;
Have formally established legal documents with the Secretary of State’s office;
Have established a registered agent with a principal place of business on record with the State.

We find that many individuals and businesses prefer to do business with people who have established a commitment to their own business through the incorporation process.

While a sole proprietorship may historically have been the preferred business structure of small business, increasing tax and liability concerns have made the LLC and corporations as the preferred form of doing business. Moreover, they can be quickly formed at modest cost.

It is important to not only protect your own personal liabilities, but also to safeguard your family assets to the extent possible. A detailed consultation with a business attorney familiar with business start-up decisions can provide assistance to the small business owner and his or her family during the business start-up process.

Even if the company had been ongoing for a period of time as a sole proprietorship, it is never too late to establish your LLC or corporation. With many areas of liability, you will be able to limit your liability to your actual ownership interest in the business (and protect your personal assets.) Additionally, at the time of sale, you could sell your stock or LLC member interest in the business entity if that is preferable for tax purposes. Additionally, as the business owner ages and becomes less involved in the day-to-day business decisions, actual management of the business could be shifted to non-owners fairly simply in a corporation or LLC.

From a tax standpoint, a general corporation may allow the business owner to vary his tax year from the traditional calendar year if that is of benefit to the type of business that is operated. An LLC is not subject to separate federal income tax on profits and must utilize the calendar year for tax purposes. Additionally, an LLC generally involves less formality and provides for more flexibility than a corporation. Both entities are important to consider, however, when either establishing a new business or when reviewing your long-term plans for your existing business.

Finally, in addition to speaking with an attorney about your new business, we also recommend that you work with an accountant that you will be comfortable with. Taxes are a big part of business and should be considered at every step.