Every business involves risk to gain profits. One of the major risks a business owner face is the business liability or debts. If the business owner is not properly protected against this risk, even minor error or omission in the business can lead to disaster. The hard work of a life time can get wiped out in a matter of days. Having a business structure that helps to protect the business owner’s personal assets is important to avoid such potential disasters. You have to keep your business separate from your personal life. To achieve that you should form a separate entity for your business activities.
It is most usual to engage in a business alone or with two or more persons. The business with one owner will be considered as a sole proprietorship and a joint operation will be considered as a partnership by default under the law. There are no legal formalities involved in forming a proprietorship or partnership under the law. In a partnership, in the absence of a partnership agreement law considers all partners as equal in their rights and responsibilities. In both these forms of business, the business owners are fully liable to settle all business obligations or debts. Their personal property can be appropriated towards settlement of business debts.
Corporations and Limited Liability Companies protect the personal liability of their business owners. These forms of business have a separate legal entity from that of its business owners. Business obligations or debts do not cross over from the business to the owners. Limited Liability Company can be formed with a single or many members. Corporations can be formed as a C Corp or S Corp. C Corps is subject to direct corporate taxation, whereas the S Corp has a pass through taxation like in a partnership or LLC. In LLC Vs S Corp, the ownership of S Corp is restricted to natural American citizens.
