All types of businesses in the world use companies. While the exact legal status varies somewhat from jurisdiction to jurisdiction, the most important aspect of a business is limited liability. This means that shareholders can share profits through dividends and appreciation, but are not personally liable for the company`s debts. Your personal liability in the lawsuit is limited to the amount of your investment, 25%. Your partner bears 75% of the responsibility in the lawsuit and can have assets seized to pay for it. Or your partner may need to use personal funds to cover the cost of litigation. So why is a separate legal entity important? In addition to personal protection against personal liability in legal proceedings, there are other benefits to being a separate legal entity. If a corporation is a separate legal entity, it has its own rights under the law. If the lawsuit costs $25,000, your bet is $6,250 for litigation ($25,000 x 25%). A DBA (also known as a “sole proprietorship”, “doing business as a fictitious name”) is a business that is not distinct from its owner, but simply another name under which the business owner operates. The owner is personally responsible for the business and its debts; All income is added to the personal tax returns of the owner(s) (intermediate tax). If there is more than 1 owner, the corporation is classified as a “general partnership”. It is a business run by a single person for its own benefit.
This is the simplest form of business organization. The property does not exist outside the owners. The liabilities associated with the corporation are the personal liabilities of the owner, and the business ends with the death of the owner. The owner assumes the risks of the business to the extent of its assets, whether they are used in the business or owned by individuals. Benefits of the LLC structure: • The owners have limited liability, which means that the company is responsible for all liabilities incurred. • The profits and losses of the company are passed on to the member and taxed only at the individual level. • Allows unlimited membership Annual meetings are not mandatory but are highly recommended, both as a good method of communication between managers and members and as proof that the LLC is a standalone entity. This last point is important because if the company`s formalities are not followed, creditors may try to break the veil of LLCs and corporate protections. Write the answers to the following problem in the working papers.
Now that you know what a separate legal entity is, you may be wondering: What is a separate entity? Good question! All businesses must be separate from the owners, members, stakeholders, etc. of the company. A separate entity simply means that the business keeps its finances separate from the personal assets of everyone involved in the business. It`s important to know that an entity can`t protect you if it`s not set up from the start. You cannot create a business entity while you are being sued and expect it to protect you. Plus, it can`t protect you if you don`t properly maintain your business in the long run. You need professional legal advice to make this decision, but the first step is to learn what the different structures are, depending on your situation, long-term goals, and preferences. But only certain corporate structures are legally distinct from personal assets, including: Liability: LLC members are protected from personal liability for debts and business claims, a feature known as “limited liability.” If a limited liability company owes money or faces a lawsuit, only the assets of the company itself are threatened. Creditors cannot access the personal property of LLC members except in cases of fraud or illegality. LLC members should exercise caution so as not to “break the corporate veil,” which would expose members to personal liability.
For example, LLC owners should not use a personal checking account for business purposes and should always use the LLC trade name (rather than the owner`s individual names) when working with clients. Individual owners include professionals, service providers and retailers who are “in business for themselves.” Although a sole proprietorship is not a separate legal entity from its owner, it is a separate entity for accounting purposes. The financial activities of the business (e.g., receiving fees) are conducted separately from the person`s personal financial activities (e.g., paying for the house). You are a sole proprietor who operates a small bakery. As the sole employee and owner, you have personal legal responsibility for everything related to the management of your business. Taxation (C-Corp): For federal income tax purposes, a C-Corp is recognized as a separate taxable entity, so the business files its own tax return (Form 1120). A C corporation is subject to corporate income tax on all corporate profits (the corporation pays taxes). Shareholders pay personal income tax on corporate profits distributed by the corporation to the owners. As a result, C-Corps are subject to “double taxation”. Taxation (S-Corp): S-Corps elects to transfer corporate income, losses, deductions and credits to its shareholders for federal tax purposes.
However, the corporation is required to report income, losses, profits, deductions, credits, etc. on Form 1120S. Shareholders of S corporations report the corporation`s income and losses on their personal income tax returns, pay federal income tax at their individual tax rates. S-Corps thus avoids double taxation. Business Benefits: • The shareholders of the company have limited liability, which means that the company is responsible for all liabilities incurred by the company. • Generally favorable training for investors. In order to maintain the limited liability protection offered by businesses, you must meet certain requirements called “formalities”. Shareholders, who usually receive one vote per share, elect an annual board of directors that appoints and oversees the day-to-day operations of the corporation. The Board of Directors shall carry out the Corporation`s business plan and shall take all necessary steps to do so.
Although board members are generally not responsible for the corporation`s debts, they owe a duty of care to the corporation and may incur personal liability if they neglect this duty. Some tax laws also provide for the personal responsibilities of the board of directors. We have described the four most common corporate legal structures with considerations for each of the following, including taxes, liability, and formation of each. Ready? Disadvantages of companies: • The process of starting the business is stricter and more expensive. • Profits are subject to “double taxation”, which means that profits are taxed at the company level and at the individual level when distributed to shareholders. • High level of governance and oversight by the Board of Directors. Are you ready to apply for a loan from Pathway Lending? Here are five steps to apply for your business loan today! A type of business entity owned and managed by a person – there is no legal distinction between the owner and the business. Sole proprietorships are the most common form of legal structure for small businesses.