Business formation types that limit personal liability

If you own and operate your own small business, or if you are looking to launch your own small business, one of the first things you should consider is how to reduce your degree of personal liability in that business. Even if you are not creating a business that has obvious risks, such as some sort of outdoor recreation or transportation endeavor, you still have certain areas in which you may be liable, or responsible, if someone sues you.

Exactly how liable you are in the event that your company becomes the subject of a lawsuit or judgment depends on the type of business entity you operate. Certain business structures, such as the limited liability company and the S corporation, can limit the amount of personal liability you have in your business. 

The limited liability company

Establishing a limited liability company is one method you can use to reduce the amount of personal liability you have in your business. Many small business owners opt for this type of business formation type because it is relatively easy to operate, meaning there is little red tape involved in terms of running the business and maintaining compliance. There is a drawback with operating this type of business structure, however. Many investors prefer to fund businesses established as corporations, rather than limited liability companies.

The S corporation

The S corporation also limits your liability, and in some cases, it can lead to substantial tax savings. S corporations are a bit more involved in terms of compliance than limited liability companies, however. For example, with this type of business structure, you must hold annual board meetings, maintain a board of directors and so on.

Both of these business formation types offer advantages when it comes to limiting your personal liability, but both also require that you stay compliant with regulations in order to remain protected. Ultimately, whether one option is a better choice for you than the other depends on a variety of factors, among them the nature, size and earnings of your business.

 

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