Choosing The Wrong Company Entity

Corporate entities come back in three categories: the good, the dangerous, and therefore the ugly. However even among the great, one size will not match all. Selecting the incorrect corporate entity will price you time, money, and your personal assets.

The "dangerous" entity is the Sole Proprietorship, where the owner is personally responsible for all claims against the business. If the business gets sued, as owner, you could lose additional than simply the corporate; you may lose your automotive, your house, everything. Though the paperwork required for a Sole Proprietorship is minimal and it is the most cost effective entity to create, it's almost never price the danger in today's litigious society.

The "ugly" entity is that the General Partnership, where every partner is responsible for the actions of the other. Any partner can obligate the partnership, even if one (or a lot of) partner(s) protests a decision. And, like a Sole Proprietorship, personal assets may be on the line. It's also important to perceive that General Partnerships can be innocently formed. There's no filing requirement. A handshake or easy business arrangement - anytime you are sharing profits and splitting losses - may be seen by the courts as a General Partnership, regardless of the intent of the parties involved. Remember, with a General Partnership you have liabilities times two. You're accountable for your own mistakes in addition to your partners' mistakes. Not a sensible approach to do business.

The "good" entities are the C Corporation, the S Corporation, the Limited Partnership ("LP"), and therefore the Limited Liability Company ("LLC"). A corporation, LLC or LP may be a separate legal entity with its own name, business purpose, and tax identity with the IRS. The corporation is responsible for the actions of the corporation, not individual owners or shareholders. As an owner or shareholder, your personal assets are protected. You're solely to blame for the money you place in to start out the company, thus every corporation offers restricted liability.

Merely filing as a company is not enough to safeguard personal assets, however. Bound company formalities should be followed (the same applies for LLCs and LPs) or a creditor can be able to claim that the business may be a corporation in name only. During this case, the company veil may be pierced and private assets claimed.

Choosing a company entity may be a detailed, complicated process. Work together with your Corporate Direct account representative to properly set it all up. They can build certain you select the correct entity, thus avoiding a huge mistake several business house owners make.