Small Business Entities: A Look at the Scope of Liability for Owners
There's no doubt that starting a business requires a lot of planning. One of the most important things to think about is how to form your business. The type of legal designation given to your company will have a huge effect on your liability as an owner. Therefore, you need to understand the implications of your choice. Learn about the differences in tax and personal liability when it comes to your business formation options.
Some of the General Commonalities
There are quite a few things that are similar between different business structures. These generally pertain to requirements imposed by business law. For example, all businesses will need to obtain a business license and worker's compensation insurance. All businesses will also have to comply with the tax reporting requirements. The exact requirements will vary depending on the jurisdiction. However, all of the general housekeeping matters are basically the same.
A Look at the Sole Proprietorship
One of the most common business structures is the sole proprietorship. This option is so prevalent because it is what most people use when starting a business. There is a good reason behind this. Most small businesses begin with one or two people (i.e. a married couple) with a simple business concept. These businesses also don't have a lot of capital to start off with. Therefore, it makes the most sense to choose a sole proprietorship due to the ease of the process.
With a sole proprietorship, you don't have to perform a lot of the filings required for other business structures. In most cases, the owners will not have to create written agreements. Thus, you can avoid the hassle of preparing articles of incorporation or a partnership agreement. Yet, there are some drawbacks to this option.
Sole proprietorships can be the worst choice from a liability perspective. As any business law attorney will explain, this structure makes you personally liable for all business debt. This means that if you end up in contract litigation, you could end up paying out of your personal assets. Furthermore, the taxes for your business will flow through your personal tax liability. As such, It may make sense to look at other structures even for the most basic business.
General Partnerships
Partnerships provide an alternative to a sole proprietorship if two or more people are involved. Under a partnership, these two people create an agreement to act as co-owners. Therefore, in a general partnership, both owners have an equal ability to manage the company. Each can also create business contracts on the company's behalf. Yet, each partner is also fully liable for the debts incurred by the business. However, the liability and authority of a general partnership can be modified through the agreement.
In contrast to the general partnership, the limited partnership provides some additional protection. This form of a partnership has one general partner, and other limited partners. Those in limited status are basically exempted from personal liability. Thus, their potential loss is limited to the amount of their investment.
Limited Liability Companies
Aside from forming a full corporation, most small business owners will opt for a limited liability company. Under this structure, owners are insulated from legal liability as with a limited partnership. The company's assets are the main source for the resolution of debt. Also, LLCs use pass through taxation much like an S-Corporation or general partnership. Therefore, an LLC can be viewed as the happy medium when it comes to business structures. Yet, you must be aware that there are filing requirements that need to be satisfied through the Utah Department of Commerce. Section 48-3a-101 of the Utah Code gives further guidance as to the formation of an LLC.
In the end, it is best to consult with a business law attorney to find out which option is the best fit for your needs. It is important to fully understand the scope of your liability before beginning a business. The future success of your company could depend on it! Contact TR Spencer Law Office to speak with a business attorney to learn more.