When you are starting a business, it is great to be optimistic and plan for success. But as any good business law attorney will tell you, you also need to plan for the opposite. If a business is not successful and creditors cannot be paid back, or something exposes the business to a lawsuit, you do not want your personal assets to be at risk.
With business entities such as sole proprietorships or traditional partnerships, you can be personally liable for your business's debts. The way to avoid this is by protecting yourself with something called the corporate shield.
A corporation is the original business form that offers limited liability, protecting business owners and their personal assets from creditors, lawsuits, vendors and other levies. Corporations are independent legal entities that are owned by shareholders. The corporation itself is legally liable for the actions and debts of the business.
Today, there are other business structures that provide limited liability as well.
A limited liability company (LLC) combines the tax efficiencies and flexibility of a partnership with the limited liability components of a corporation. LLCs are not taxed as a separate entity. Instead, owners, or "members," of an LLC report profits and losses on their personal federal tax returns.
An S corporation (S Corp) is a type of corporation that also allows profits and losses to pass through the owner, or "shareholder," instead of being taxed twice, once as a corporation and again personally. At the same time, the S Corp is still considered to be a unique entity that is legally separate from those who own it. However, owners are not completely shielded from all litigation that the business may face.
As you can see, there are a few options available to protect your personal assets from business debts and liabilities. These, albeit more complicated business structures, also have many other benefits that nearly always make them favorable over a sole proprietorship or traditional partnership.
Learn more about business entities here.