If you want to start a business, the first thing you need to determine is the type of entity that best suits your needs. Sole Proprietorship, Partnership, Limited Liability Company, and Corporation are some of the common business entities, each with positive and negative attributes.
Sole Proprietorship offers flexibility and convenience but is not suitable for shielding personal and business assets. The owner of a sole proprietorship assumes all the risks of the enterprise and the creditors of the firm can pursue collection against business assets and personal wealth.
General Partnership is similar to a sole proprietorship. All partners are liable for the action of other partners. If you wish to start your business as a partnership firm, you can go for a limited liability partnership (LLP). A LLP limits the liability of each partner. A partner in an LLP cannot be held liable for acts of other partners. An LLP is a separate entity so there are some tax benefits as well. Doctors, lawyers, and other professionals prefer this type of entity to avoid liability
A Limited Liability Company is the best type of business entity for asset protection. Properly drafted, it protects members from the debts and liabilities of the company. This entity is formed by filing Articles of Association with the Secretary of State. An operating agreement controls the internal workings and the relationship between the organization and members. Benefits of running your business in this form of entity low cost to incorporate and flexibility in sharing profits and losses as members see fit. As it is a pass-through entity, double taxation can be avoided.
A Corporation is another type of business entity that offers great asset protection. It is owned by shareholders, who elect a board of directors to oversee and manage the business operations. The directors provide high level company direction. Creditors of the shareholders cannot access corporate assets. The shareholders, officers, and directors do not have any personal liability for the debts and obligations of the corporation.
An Offshore Corporation is another excellent option to safeguard personal and business assets. Choose a country that has strict asset protection laws. See Chapter Seven for further information.