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Limiting Personal Liability for Business Debts: Choosing the Right Entity

Updated: Jul 25, 2022

WGSF Newswire:  Limiting Personal Liability for Business Debts:  Choosing the Right Entity

By Deirdre Burke Moser, Esquire 

The United States is the world leader in lawsuits, which cost the U.S. economy $264 billion per year.  Litigation costs small businesses in America over $100 billion per year.  According to the U.S. Chamber of Commerce report in 2013, one in three small business owners report that they have been sued or threatened with a lawsuit.  Creditors can attach homes, cars, savings, or other personal assets.  Business owners need to take appropriate steps to protect their personal assets from this epidemic of litigation.  One way to mitigate those risks is to create a business entity.  Whether for a sole proprietorship or a large-scale operation, the advantages to forming a corporate entity are numerous.  The three most popular entities are a corporation, a limited liability company (LLC), and a limited liability partnership (LLP).

A corporation is a business entity owned by shareholders and managed by a board of directors.  This form of entity has been around much longer than LLCs and the rules governing the liability protection afforded to shareholders are longstanding.  One drawback is that corporations are a bit more difficult to run as most states place strict requirements on how corporate decisions have to be made and reported.  In addition, there are more “formalities” involved in managing a corporation from a legal standpoint and the additional paperwork can be daunting for small business owners.

The LLC has no board of directors or shareholders.  Instead it is owned by “members”.  From an organizational standpoint, it offers the greatest flexibility.  It can be structured like a partnership to be managed by the partners.  It can also be set up more like a corporation and owned by the members but managed by a board of managers.  If you run a smaller company and are looking to reduce risk, a limited liability company may be a better fit.  There are fewer legal and paperwork requirements that have to be adhered to, making LLCs easier to run.  In addition, the LLC gives the owner the greatest number of choices of tax status.

The Limited Liability Partnership is a business entity in which a group of people or companies or mixture of both come together to create a business.   There are different “classes” of partners with different interests, rights and powers.  Limited partners are not involved in the day to day running of the business, but want to reap the economic benefits of their investment.  The general partner controls the partnership and can also reap economic benefits.  There are no shareholders or directors.  An LLP is not the same as a traditional general partnership.  A general partnership has the disadvantage of all the partners being jointly and severally liable, regardless of their involvement in the partnership, so from a liability standpoint, creating a traditional partnership is not a good option.  The advantage of a Limited Liability Partnership, on the other hand, is it has aspects of both the traditional partnership and the traditional corporation.   Unlike a traditional partnership where all the partners are jointly and severally liable, in an LLP, the partners are not responsible for their partner’s negligence or misconduct. LLPs are not as popular because some jurisdictions require a general partner to have unlimited personal liability.  Small business owners instead opt to create an LLC where no member is facing personal liability.

Finally, there are certain forms of business ownership that do not offer risk protection.   These include general partnerships, sole proprietorships and fictitious names.  If one is creating an entity with mitigating risks in mind, these entities can impact your personal assets if a legal action arises.  They may sound like good options on paper and less cumbersome to create, but in the long run, the small business owner should consider creating a corporation, an LLC or an LLP.  Choosing your business entity can make all the difference when one wants to protect his or her business from potential legal actions.  A corporation, an LLC and an LLP offers the small business owner peace of mind that when he goes to sleep at night, he did everything he could to protect his company, his investment and his family.

Check out our business team at Fiffik Law Group .

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