Corporate and LLC Structures May Protect Sole Proprietors’ Assets

• Find out why corporate and LLC structures may be better business structures for you than a sole proprietorship.
• Learn the difference between corporate and LLC structures.
• Find out how to protect yourself and your shareholders.
• Discover the importance of separating the individual and the organization.

There are plenty of advantages to being your boss. However, that doesn’t mean that every decision is easy. One of the first things you’ll have to decide is the type of business structure that is best for your situation – sole proprietor, corporation, or LLC structure.

Selecting “sole proprietor” may seem like the path of least resistance. However, if you have personal assets at risk for your business’s debts and liabilities, it may make more sense to go with the more complicated route of electing to form a C- or S-corporation, or even a limited liability corporation (LLC).

What is the difference between corporate and LLC structures?

In a nutshell, if you set up as a C corporation – the preference of venture capital investors – you’ll have to pay taxes as both an individual and as a corporation. By contrast, you are only taxed once at the individual level with S-corporations and LLCs treated as a flowthrough entity.

No matter which entity you choose, you won’t find the process costly or complicated. Also, if you decide to switch at a later date you can do so easily. Still, it’s important to understand that filing a Certificate of Incorporation does not entirely protect you from personal liability. To provide yourself and your shareholders with the highest level of personal protection, make sure that you do the following:

• Never use your personal name or the name of a shareholder on any official documents. Whether invoices, correspondence, or contracts, the official corporate name is the only appellation that should be used, and the word “inc.” or “corp.” should be included where corporate. This is the best way to ensure separate entity recognition. The same is true whenever signing on the company’s behalf. Only use the corporate name and include your title, as shown below:

  CORPORATION NAME By: ___________________________________
  Name and official title of the authorized signer

• Maintain entirely separate bank accounts for your personal funds and your corporate funds, as well as separate taxes. Corporate tax liabilities should be paid from corporate accounts and personal taxes from personal accounts; the same is true for shareholders.
• Assuming that you have corporate bylaws and other formalities, make sure that you follow all of them to a tee. This may include ensuring that meeting minutes are recorded, that the Board of Directors holds regular meetings, and that stock is issued.

Keep it clean

The clearer and cleaner the line between the organization and the individual, the higher the level of personal protection. So, make sure that there is a separation between corporate and individual transactions.

Have questions about what type of entity is right for you? Call Fiducial at 1-866-FIDUCIAL or make an appointment at one of our office locations to discuss your situation.

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