Virtual General Counsel LLC
Virtual General Counsel LLC

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Which small business structures shield owners from liability?

| Sep 3, 2018 | Business Formation |

In a sole proprietorship or partnership, generally the owners of the business can be held personally liable for the debts and actions of the business. This is obviously not desirable to most small business owners in Denver. Fortunately, there are other ways to structure a small business that limits the business owner’s personal liability for the debts and actions of the business.

One way to reduce personal liability is through the establishment of an S corporation. S corporations also have tax advantages that small business owners may wish to take advantage of. An S corporation has a board of directors and must hold board meetings each year. In addition, there is also paperwork that must be filed in order for the S corporation to be compliant with the law.

Another way to reduce personal liability is through the establishment of a limited liability company (LLC). An LLC is similar to an S corporation in that it shields owners from personal liability, but it doesn’t have all the formal requirements an S corporation has. In addition, an LLC can have an unlimited number of owners, while an S corporation can only have up to 100 owners. However, investors sometimes prefer S corporations over LLCs.

That being said, even with a S corporation or an LLC, there still is a risk of personal liability. If the business doesn’t file the appropriate paperwork every year and pay renewal fees, the owners could face personal liability. Also, if an owner personally guarantees a business loan, he or she could still be held accountable for paying back that loan. If an owner places his or her signature on a business contract under his or her name, he or she will be personally liable should the contract be breached. Finally, an owner cannot hide behind the structure of his or her business to shield him or herself from criminal liability.

As this shows, it is important to carefully think over what business structure you’d like your small business to take. There are advantages and disadvantages to all of them. A sole proprietorship or partnership is relatively easy to establish in comparison to an S corporation or an LLC. However, S corporations and LLCs offer personal liability protection that a sole proprietorship and partnership do not. By carefully thinking through one’s options, those looking to establish a small business in Colorado can choose the entity that best suits their needs.