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Planning to open your own business?

September 2020 | William J. Monaco, Esq.
If you are considering forming a business of any kind, should you consider forming a corporation or other entity? The quick answer to this question is yes! Entity formation comes with various benefits, including that it shields the principals from personal liability.

What does this mean? Very simply, if a third party (such as a supplier or customer of the business) has a dispute with the business, or is injured on the premises, any resulting liability that the business may have will generally not be transferred to the shareholders or officers of the corporation or other entity. People starting their own business may therefore protect their own personal assets (house, bank accounts, etc.) from creditors of the business.

The two most popular types of entities among people wishing to start their own businesses are Corporations and Limited Liability Companies (LLCs). Corporations are the easier of the two to form and typically carry the least expense, but LLCs also are not difficult to form. In addition, the cost associated with LLC formation (while a bit more than corporations) is also worth it for the protection that it can afford the principals.

Note that there are tax benefits/consequences to each, and you should consult a qualified tax professional before selecting either entity. There are also yearly costs associated with maintaining business entities you should discuss with your tax preparer.

In general, if your business (corporation or LLC) is sued, you have a shield against personal liability. There are exceptions to this rule for items such as fraud, tax liability, some employee matters or other circumstances that should be discussed with your legal advisor.

In order to enjoy the benefits of the corporation or LLC “firewall,” separation of your personal finances from business accounts may be vital. For instance, owners of a closely held corporation often use corporate bank accounts to pay personal bills and are not careful about signing corporate documents in their corporate capacity (as president for example). These practices can significantly erode the protection you need and should be avoided. Make sure to discuss with your legal advisors when uncertain about any practice or procedure as it’s better to be safe and give some thought to these issues at the start.

A “Doing Business As” (DBA) certificate, while giving you the right to use a particular name (at least as far as the state or county is concerned), will not itself afford you the protection of a corporation or LLC.

Corporations and LLCs can also file for DBAs, such as XYZ corporation “Doing Business As” ABC Company. This is a way to obtain another business name perhaps more recognizable to the public but also simultaneously shield your personal assets with use of a corporation or LLC. Filing for only a DBA in your personal name does not shield you from personal liability.

In general, entities such as corporations and LLCs can be a great tool to pursue a business without the risk to your own personal hard-earned assets. There are rules and practices to follow that are necessary to maximize the benefits of those entities. As always, it is wise to seek the advice of professionals before jumping into anything such as the formation of a business.

If you have any questions about the matters discussed in this article, please contact your Legal Service Plan’s National Legal Office at 800-292-8063.