Business formation benefits and risks: LLC most flexible, corporation most protective.

• Author: Waller, Jeff
• Position: Legal Speak

Are your personal assets (house, car and bank accounts) exposed to your business debts and liabilities? The legal separation between the business and its owner is often not considered until the business is in financial trouble or being sued. There are four common types of business formations--sole proprietorship, partnership, corporation and limited liability company--each with benefits and risks.

Sole Proprietorship

A sole proprietorship is the easiest business to form because no official action is required. When you start doing landscaping for hire, or selling cupcakes to local coffee shops, or any other type of enterprise, a sole proprietorship has been formed.

In a sole proprietorship, you and your company are one. The company's profit or loss is the owner's profit or loss because there is no legal separation between the business and the owner. That means that everything you own could be used to pay the debts of the business, and vice versa.

Partnership

Another common business formation is a partnership. Forming a partnership is as easy as two or more people agreeing to go into business together. Partnerships are attractive because each person can bring their skills to the business. Like a sole proprietorship, no official paperwork is required to form a partnership. However, a partnership can put your personal assets at a greatest risk, even if you have a written agreement limiting the responsibilities of each partner. Any such partnership agreement is only between the partners and does not affect who can sue you and why they can sue you. For example, you may agree in writing that no material purchase can be made without approval from all the partners; however, if Partner A goes out and buys five new trucks in the partnership's name, the partnership and the partners are obligated to pay for the unauthorized trucks. While Partners B and C could sue Partner A under their partnership agreement, if Partner A is broke, or bankrupt, the other two partners are most likely going to pay for the vehicles. In a partnership, you are at risk for practically anything your partner does.

Corporation

Forming a corporation or an LLC are the best methods to protect your personal assets from business liabilities. The corporation is a type of business formation that has been in existence many years. The LLC is a more recently developed business type, and is the most flexible.

A corporation is treated as an...