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Business formation types that limit personal liability

When you legally establish your own small business, the type of business structure you ultimately choose will affect everything from how you govern your company to how you file your taxes. In other words, it is an important, impactful decision, and the more you understand about the process and the different business formation types that exist, the better your chances at selecting the best option for your unique needs.

Regardless of the type of company you are looking to establish, you will find that there are certain areas that potentially expose you to liability. For example, if you operate, say, a taxi company, you face obvious liabilities relating to transportation; while if you operate, say, a cookie company, you run the risk of someone suing you if they get seriously sick after consuming your product. In other words, all businesses have their own risks, but there are two types of business structures that can help protect you in the event that someone sues or files a judgment against you.

The limited liability company

If you have concerns about placing your personal assets in jeopardy when you establish your business, one business formation type you may want to consider is the limited liability company. In addition to being a business structure that limits personal liability, a limited liability company is also relatively easy to operate. However, there is at least one drawback of establishing this type of structure. If you want to secure investors for your business, most prefer to put their money into established corporations.

The S corporation

If personal liability is a concern, but you also want to secure investors for your business, you may want to move forward with establishing an S corporation. Like a limited liability company, the S corporation reduces your level of personal liability, but it also offers additional tax benefits, among them pass-through taxation. Operating this type of business structure is a bit more involved, however. It requires that you maintain a board of directors and host annual board meetings, among other compliance requirements.

Regardless of whether you choose the limited liability company, the S corporation or something else entirely, keep in mind that you must stay compliant to protect your personal assets.