Here There Be Dragons

Dragon

Congratulations! You have decided to start a business on your own.  That is awesome!  Go forth and conquer; you got this.  But be ready for battle.  As those maps of early explorers pointed out: Here there be dragons.  Suit up accordingly.

One of the easiest and arguably most important thing to carry is a shield.  How about a nice liability shield that fends off blows from those looking to obtain monetary awards from you?  One that limits them to just the money in the company rather than your personal assets.

Sounds good, doesn’t it.  And that is why should form a business entity.  Please, PLEASE, don’t be a sole proprietorship.  What’s that? It is when you are start a business but your company doesn’t become an entity separate from you.  You just start – no LLC, no Inc. just you (and maybe a partner).  Those sole proprietors or partnerships go into battle without the biggest shield.

If you are a sole proprietorship, you have unlimited personal liability for all of the debts and legal liabilities of your business.  If you are a partnership, make that times two.  Each partner is now liable for the other partner’s actions in the business, too.  Your personal assets are at risk to satisfy unpaid debts, legal judgments, taxes and other legal obligations of your business.  This may include your home or personal bank account.  Eek!

To build your shield, you can choose to be a limited liability company (an “LLC”) or a corporation.  An LLC is often easiest, but some companies prefer to be corporations.  An LLC or corporation is a separate legal entity liable for its own debts and obligations.  That means that you as an LLC member or corporate shareholder are normally not personally liable for the company’s debts or legal liabilities. There are times that as an LLC member or corporate shareholder, you may still be personally liable for things involving the company.  For example, you may still be responsible if you personally guaranteed repayment of a loan or you act outside of the scope of your business.  But in general, you are wielding a pretty good shield against the claws and fire that may come at you.

While a sole proprietorship or partnership seems easiest and the least expensive at first, it can be very expensive for you in the long run.  Next week, we will discuss what it takes to create either.  In the meantime, start designing your crest, I mean logo.

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