By Garrett Sutton, Esq.
An entity is a separate legal being, such as a corporation, Limited Liability Company (LLC) or Limited Partnership (LP). All provide much greater asset protection when compared to a sole proprietorship or general partnership. It is the ‘separateness’ of an entity which protects you – the entity’s owner – from unlimited personal liability. Without that separation, if an angry customer sues you, any assets you own such as your house, car or bank account can all be taken should a judgment be found against you. An entity is a business organized according to state law to limit the liability of the owners.
An entity can’t protect you if it is not set up right at the start. Furthermore, it can’t protect you if you don’t properly maintain your entity over the long term. Set up your business or investment as a Corporation, limited liability company (LLC) or limited partnerships (LP) to take advantage of these benefits:
Keep Your Businesses and Personal Assets Separate
This can protect personal assets such as your home and bank account from claims against the business. This is far superior to using a sole proprietorship or general partnership, which again offer no asset protection.
Create Separate Entities for Greater Asset Protection
Some business owners create more than one corporate entity and segregate assets among different business entities for asset protection. This can lower each asset’s exposure to claims.
Build Business Credit
You won’t get far using a sole proprietorship for business credit-building purposes. You need a separately chartered and active (meaning all state fees are paid) business entity for this purpose. For more on this, read this post about how to establish business credit.
Enjoy Tax Benefits, Lower Audit Rates, and Make More Money
Sole proprietorships are audited at a rate five times higher than corporations. There are also many tax benefits to using a corporation, LLC or LP. Many business expenses are easily written off and pre-tax dollars can be used for valuable benefits packages. An Experian study found that incorporated business owners had incomes 35 percent higher than the overall population.
My book, Start Your Own Corporation, discusses choosing the right entity in great detail.