Does Your Business Structure Protect You?

There are a surprising number of small businesses and startups who never file as a specific type of business structure. While it’s perfectly fine to run as a sole proprietorship or partnership, you should at least know what that means from a legal perspective.

If you’re a sole proprietor or a partner, your personal assets may be subject to risk. In the off chance that you are ever sued or if you file bankruptcy, your assets (home, car, other real estate) can be taken as payment. On the other hand, filing as a corporation or LLC protects your personal side.

Corporations have their own sets of benefits. There are tax deductions you wouldn’t otherwise qualify for, and the corporation acts as its own entity, so you file business taxes rather than reporting its income on your personal taxes. But there are a lot of hoops to jump through. You need a Board of Directors and have to file Board minutes several times a year.

An LLC (Limited Liability Company) also protects your personal assets, and there’s fewer red tape than with corporations. You can also use the “pass through” tax regulation, which means you file the business’ income on business tax forms.

There’s some great information about Corporations vs LLCs on CorpNet’s site (disclaimer: they’re a client of mine, but they really do have great info!).

Deciding What Structure You Need

It can seem daunting, choosing a business structure. But consider your needs. If you run a business part time making crafts, you may not need to bother with the formality of a corporation. But if you run a restaurant that hasa lot of money invested in it, a corporation could protect your personal assets should someone burn their mouth on the (clearly labeled) hot coffee you serve and decide to sue.

You might decide to change your structure down the road. If you’re small now and don’t see the benefit to incorporating or becoming an LLC, you might change your mind as your business grows. There are plenty of online resources, and you can also ask a lawyer or small business expert for advice if you just can’t decide. You can file the business entity yourself or use a service like CorpNet to assist you.

The most important point I’m trying to make is: protect yourself and know your options. Better to be overprotected and not need it than find yourself stripped of your personal assets and your business.

Photo: Dunechaser on Flickr

About Susan Payton

Susan Payton is the President of Egg Marketing & Communications, an Internet marketing firm specializing in marketing copy, blog and article writing. She is the blogger behind The Marketing Eggspert Blog, and also writes on Small Business Trends, Growth University and BizLaunch. Follow her on Twitter @eggmarketing. Susan Payton on Google+!