In The Beginning…Choosing Your Business’ Legal Identity
Updated: Nov 15, 2022
Your ideas. Your dreams. Protect them!
Starting out can be downright scary. Will my venture make money? If I build it, will they come? How can I protect my personal assets if something goes wrong?
The attorneys at Law and Justice help budding entrepreneurs find the right form. Selecting the right legal business identity goes a long way towards protecting your personal wealth in case your business, or the economy, takes a wrong turn. The current COVID-19 crisis is the perfect example.
This is the simplest structure to create from a tax and legal standpoint. You just open up shop, hire employees, pay for inventory, and you do so with minimal start-up barriers. As your accountant will explain, the profits you earn will flow through to your personal California and Federal income tax returns. There are little legal formalities to set up. However, because this type of entity is really you, you'll bear all of the risks that the business incurs. For example, if your employees do bad acts, you may be vicariously liable for their actions. Those harmed may be able to reach your personal assets.
Limited Liability Company (“LLC)
As the name suggests, this formation creates a separate and distinguishable entity that is meant to limit liability just to the company itself. If your business takes a turn for the worse and creditors are knocking at your door, they can only seek repayment from the LLC’s assets. Absent fraud on your end, your personal wealth can’t be touched. However, this business structure is more complicated to set up and will require additional tax and legal filings with governmental agencies. Legal formalities must also be followed.
Electing S-corporation Tax Filing Status
Depending on your tax situation, and your accountant can help you decide which way to go, electing S-corporation tax filing status may be the appropriate path. The income will be a pass-through to you via a K-1. In addition to having certain tax advantages (i.e., minimizing self-employment tax, avoiding the double taxation of the C-corporation, etc.), you will also get the limited liability protection as well.
These are some of the basic legal structures to consider as you start out on your own. Give us a call—we’ll be with you as you begin your journey…