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What to Expect: Business Liability

One of the main considerations when choosing a business structure, or legal structure, is liability. Sole proprietorships, for example, are the easiest to set up and the best fit for people who are in business for themselves and don't have any employees. However, businesses that hire employees or have a more complicated makeup may choose a structure that offers more protection from personal liability. There is no personal liability for debts in corporations, for instance.

There are other factors to consider before choosing a legal structure for your business, including taxes and cost of setting up, so your choice shouldn't focus on just one consideration. The following chart is intended to help you make better sense of what to expect from various business structures in terms of liability, in terms of business debts and taxation. 

Type

 Is owner/investor personally liable for business debts?

Is federal tax imposed on business income/profits or do income/profits "pass through" to owner/investor?

Sole Proprietorship

Yes.

Business income/profits "pass through" and are reportable on the sole proprietor's personal income tax return.

General Partnership

 Yes.

Business income/profits "pass through" and are reportable on the general partners' personal income tax returns. However, a partnership will need to file an informational tax return with the IRS.

Limited Partnership

A limited partner is not personally liable unless the limited partner is active in the management of the business. However, a limited partnership must have at least one general partner who is personally liable for the business debts and obligations.

 Business income/profits "pass through" and are reportable on the general and limited partners' personal income tax returns. However, a limited partnership will need to file an informational tax return with the IRS.

Corporation

 No.

A "C" corporation is taxed on its profits before the profits are distributed to the shareholders. Shareholders are then taxed on the dividends they receive (double taxation). An "S" corporation is not subject to double taxation; the profits "pass through" to the shareholders who report the distribution on their individual tax returns.

Limited Liability Company (LLC)

 No.

Business income/profits "pass through" to the members of the limited liability company and are reported on their individual income tax returns. However, a limited liability company will need to file an informational tax return with the IRS.

Learn More About Business Structures and Liability: Talk to an Attorney

Only you and the other officers involved in your business know exactly where you want to take your business -- and perhaps you're not even sure yourself. Looking into the future and honestly assessing your goals is important when choosing which type of business structure is the best fit for your operation. Keep in mind, however, that businesses may (and often do) change their structure as needed. Contact a business organizations attorney near you to learn more about liability and business structures.

See FindLaw's Incorporation and Legal Structures section for more articles and resources, including Benefits and Drawbacks of Different Types of Business Entities and Business Structures: Which One is Best for Your Business?

Next Steps
Contact a qualified business organizations attorney to help you
choose the best formation for your business.
(e.g., Chicago, IL or 60611)

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