May 10, 2013 Leave a comment
Protecting Personal Assets from Business Liability
It’s time to discuss business liability. The conversation up to now has been on the general consequences of operating as a sole proprietor or a partnership.
A constant concern for a business owner is the impact of a formal complaint or lawsuit. Being self-employed may put a business owner in a precarious position in terms of protecting personal property. In a self-employed (including partnership) situation all revenue and obligations flow directly to the self-employed business owner. Unless legal steps are taken to protect personal assets from business challenges, personal assets can be encumbered or lost in a liability dispute.
A small business owner can protect personal property from the consequences of liability by becoming a Limited Liability Corporation (LLC) or a regular corporation. The specific formalities of each legal form must be followed to obtain the protection sought for personal assets of a business owner. To maximize the desired liability protection an attorney and/or accountant should be consulted to determine the best strategy to use for the specific situation.
A LLC provides the most flexibility for a sole proprietor. The use of a LLC allows the business owner to retain the advantages of direct taxation to the owner. This means business revenues are taxed just once. Another way to express the tax process for a sole proprietor or partnership is as a pass-through tax. As a LLC this tax process is intact and personal property is usually cordoned off from exposure to business liabilities.
Many small business owners avoid the incorporation step given the impact of double taxation on revenue, first to the business and then to the business owner. In a corporation the owner is considered an employee of the corporation. As such, personal property is usually protected from any business liability. The corporation is presumed responsible for any business liabilities.
There are other methods of protecting personal property from business liability. One way that has nothing to do with the legal form of the business is to have all personal property owned by a person not connected with the business. This limits claims of business liability to property owned by the business.
Many sole proprietors consider incorporation as the business grows. A sound business reviews all options annually to ensure the best legal strategies are in place at all times.
(This article is not a complete view of possible tax consequences for each form of incorporation. A tax attorney or accountant should be consulted before any legal business form is determined.)
C Moynihan May, 2013