One important topic to keep in mind when choosing the type of business that you want to form is whether you will be personally liable for the actions of the business. Personal liability can expose you to significant financial ramifications should your business go bankrupt or be sued. There are some business structures that shield you from personal liability that might be worth considering.
Business types that leave you personally liable
Some types of businesses leave owners personally liable for the debts and actions of the business. Two of these business structures are sole proprietorships and general partnerships. These business structures are easy to form, but they do not create a business entity that is separate from the business owners or partners. So, the owners or partners remain personally liable for the debts and actions of the business.
Business types that shield you from liability
Some business structures shield owners from personal liability for the debts and actions of the business. Two of these types include limited liability companies (LLCs) and corporations. Sometimes, a limited liability partnership also shields certain owners from personal liability.
These business types are more challenging to form, but they create a separate business entity. This means that the business itself, not its owners, officers or shareholders, is the entity that is responsible for paying debts and the entity that can be sued.
Piercing the corporate veil
It is possible, under certain circumstances, for owners or officers of a corporation or LLC to lose their personal liability protections. This is referred to as “piercing the corporate veil.” For example, owners or officers of a corporation or LLC might be held personally liable for acts of fraud or other acts of misconduct.
The type of business you choose to form offers advantages and disadvantages to you as an owner. One advantage is protection from personal liability. Depending on your needs and circumstances, choosing a business structure that shields you from liability might be worth considering.