What’s at risk?
Now that you’ve built a business, you need protection. Aside from the legal protection commonly sought after. The assets of the business and your personal assets. You’ll see it on the news from time to time, a successful business person losing their home and cars because the business came crashing down.
You’ve already played your risk in getting the business off the ground. Venturing into territory unknown to you and placing your stake. Every business owner has given some large amount of time and effort; usually with a pay cut on top of it. What needs to be protected after giving so much is what you had already worked for. You personal assets such as your house and cars.
For Your Business
Conversely, your business needs protecting too. This is when we see hilarious movies with Jim Carrey, after the business assets are so drained and depleted from the unwarranted executive bonuses and massive payouts to owners that the business is doomed.
How do you separate it?
There’s no clear cut way that works for every company between distinguishing the company from the owners. The essential need you want to fill is that should anything happen with the economy, or moves of malicious intent against the company don’t affect the owners. This includes initial investors and the primary shareholders. The same goes around that any personal debts of any owner are not debts of the business. The best way to establish this is through the system of incorporation. Incorporating permits businesses to become legal entities. Taxes, banking, documentation is now all primary to the legal entity of the business. When incorporating you essentially create a recognized person. This permits the company to enable itself to grow in raising capital, become public, and existing to some point forever.
LLC is a Limited Liability Corporation. Creditors are generally prohibited from using the companies assets to pay personal debt with protection of outside liability. There are some loopholes here in that if money is owed to the government by a shareholder they can place a lien on any money earned off of the owned shares. From the business protection perspective though the assets of the owners cannot be seized for the debt of the company. Except under extreme circumstance, such as the Internal Revenue Service attempting to determine whether to dissolve a Limited Liability Corporation if the corporation is held by a single member or activity is thought to be suspicious. All of these are within reason. LLC’s are the most popular, easiest to understand, and pretty much intended for small businesses.
A C Corporation directs that all taxes for all revenue and expenses be processed by the legal entity of the business and not through the owners at all. This does create a very simple way of managing personal taxes too. The primary concern that wards off businesses is that there is some effect of being taxed twice if the company is public. When the company is public the owners are required to pay taxes on the dispersed dividends as personal income tax. Because the C corporation and the owners are not connected in any way there is no observation of this double tax effect.
Choosing to be an S corporation is that you and your company have been deemed as applicable to utilize a corporation basically for transfer reasons. Yeah, the company is still its own entity, but it’s stated directly that it’s giving everything to the owners. The includes expenses and income for tax purposes. However, assets are still protected separately. Business income is on your personal tax information and the business does not pay tax. Which is a pretty alluring option.
What is your business now?
Your business is its own person now. A legal entity that makes your business dealings so much easier. Should you ever want to sell the company, now they purchase the corporation. A packaged deal ready for the next owner. It can raise its own capital to grow, and be sued. The legal responsibilities are now the companies. This does not absolve the owners of the responsibilities of operating the business or providing the means of the business to pay bills and taxes accordingly.
When broken down to the situations that a company can find itself in, incorporated companies are to an extent people on paper. Corporations are guaranteed due process, fair and just legal proceedings, the ability to be attacked and respond legally.