Limiting Liability in Your Business Structure
Whether you're a current or future small business owner, asset protection planning extends well beyond protecting your personal assets by being aware of and maximizing your personal exemptions.
Your business is likely to be your riskiest undertaking. Therefore, it makes sense to consider carefully the organizational form in which your business is conducted. While you can choose to run your business as a sole proprietorship, partnership, corporation or limited liability company (LLC), in most cases the LLC will offer the most effective protection for both your personal assets outside the business and your investment in the business itself.
But there is much more than that to consider when structuring your business. This section sorts out all the specific considerations that must be examined when making an entity choice, including the best way to set up your financing, what tax and securities issues should be addressed, and how best to secure the protections afforded to you by law.
- Choosing an Organizational Form for Your Business examines the characteristics of all of the business forms available to you, including the newest business entities, such as the limited liability limited partnership (LLLP), and an alternative and superior form of the corporation: the statutory close corporation. Also discussed are the most recent developments in laws governing LLCs, which make LLCs more widely available to business owners, and which add to the LLC's advantages over other forms.
- Comparing the LLC and Corporation builds on the material presented in "Choosing an Organizational Form for Your Business" by providing a more detailed and comprehensive comparison of these two most useful business forms.
We compare and contrast the two forms, including discussions of protection from liability, costs of formation and operation, income and self-employment taxes, retirement and fringe benefits, securities and estate planning issues, etc.
- Using Holding and Operating Companies details an important strategy that should be considered by every small business owner--using a two-entity structure. In this type of arrangement, an operating entity will carry out the actual business functions and a holding entity will own the major capital assets of the company, often including the operating entity itself. In this way, you can provide a nearly impermeable shield for your business assets against the claims of business and personal creditors. It is possible for business owners who desire a simplified structure to personally act as the holding entity, although in that case the liability shield will not be as strong.
The discussion of funding strategies includes a description of which assets should be invested within the business form, and which assets should be owned outside of the form, as well as the proper mix of assets between an operating entity and a holding entity.
- Choosing a State allows you to make an informed decision when deciding on the state in which your business entity will be formed. The liability and internal affairs of a business entity are governed by the laws of the state in which it is formed, not the state in which it operates. While forming the business in your home state may offer simplicity and cost savings, states such as Delaware and Nevada may, in some cases, offer superior liability and other offsetting advantages.
- Planning for Federal Estate Taxes examines an often-overlooked, but important, issue in business formation. A business that thrives and grows will produce tremendous wealth for its owner. Yet, in the absence of effective estate planning, much of this wealth may be paid to the federal government in the form of estate taxes, rather than to the owner's family, when the business owner dies. The strategies contained within this section will help to preserve that wealth.
- Securities Law Issues includes an examination of the complexities of federal and state securities laws. An understanding of this is essential because solicitations of capital from even small numbers of individuals can result in civil, and even criminal, penalties, if you do not comply with the restrictions imposed by these laws.
- Tax Aspects of Funding Decisions completes the discussion of issues that surround structuring and funding your business. In particular, funding a business entity with services or assets subject to liabilities can have important tax consequences, in terms of the immediate recognition of taxable income, as well as the tax basis of your investment in the business. Tax basis, in turn, affects the allocation of the entity's income among its owners, and the amount of gain that owners realize when they sell their interests.
- Establishing the Business Entity is the capstone to this section. After you have chosen a particular business form, the particular state in which you will create the entity, and the structure for the business, you must actually form the entity or entities that will make up this structure by completing certain documents, filing them with the proper authorities and paying the appropriate fees.
We describe the actual process of forming an entity, registering to do business in other states and using a fictitious name. We also emphasize the use of proper documentation when forming a business entity.