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What Corporations And Limited Liability Companies (Llc) Have To Offer - Protect Your Assets!
by Alon Darvish, Attorney at Law -- March 29, 2006
Do you own a business? Are you operating under a Fictitious Business Name (otherwise known as a DBA)? Did you know that if you get sued for something you did while conducting business under that DBA, a creditor can receive a court judgment and seize your personal assets?

That’s right! Operating a business under a DBA, whether it is a new business or an on-going business, is not the right solution – especially if you own assets, such as a home.

 

Alon Darvish, Attorney at Law

Sole Proprietorship

A sole proprietorship is one that operates a business under their own name or under a DBA and has not registered with the state as Corporation or LLC. The owner of the business reports business income and losses on their personal income tax return. Although operating under a DBA is the easiest way to operate a business, it leaves you at risk because you and your company are one and the same. You are personally liable for any losses, debts, and court judgments of the business.

Partnership

A partnership is no better. A partnership is similar to a sole proprietorship, in that the owners haven’t filed paperwork to become a corporation or LLC, and the business is owned by two or more individuals. Again, the company and the people behind it are one and the same. The partnership begins as soon as you start business with another person.

Working with a partner makes matters worse because not only are you responsible for your own actions, you are now responsible for your partners actions. For example, if you were in a partnership, and your partner obtained a business loan, you are also personally responsible for this debt mainly because you are part of “the partnership.” That means, if your partner filed for bankruptcy, the creditor can come directly after you, file a law suit, obtain a court judgment, and place a lien on your personal assets, i.e., your home.

Operating a business as a sole proprietor or partnership is not recommended. The correct way to transact business is under a separate legal entity, such as a Corporation or Limited Liability Company (LLC). One of the biggest advantages that both of these entities offer is this limited liability protection. In essence, you are not personally liable for your business debts. If you operate your business under a Corporation or LLC, only business assets are liable for debts and court judgments. Your personal property continues to remain safe from business creditors.

Corporations

There are many additional benefits to forming a corporation other than the limited liability protection you receive. Undoubtedly, if you operate as a sole proprietor, or under a partnership, you are paying 15.3% in self-employment tax (SE Tax). This tax is in addition to income tax you pay. You can minimize the amount you pay in SE tax merely by forming and properly operating a corporation. SE tax is assessed by the amount of salary you as an individual receive. If the corporation paid you partially through salary and partially as a draw (not subject to payroll tax), SE tax would be based on your salary only. For example, if the corporation made $100,000 in a given year, the corporation can pay you $50,000 in salary and the remaining $50,000 could be taken as draws not subject to payroll tax. SE tax will be based on the $50,000 you receive in salary – not on the draw. However, if you operated as a sole proprietor or partnership, it would be based on the $100,000 personal return. Additional benefits of forming a corporation include fully deductible health, life and disability insurance. Retirement funds and qualified retirement plans, such as 401(k), may also be established more easily.

However, with these benefits comes responsibility. You must treat the corporation as a separate legal entity. That means, you cannot commingle your personal assets with your business assets. You have to treat your personal life and your business life separate. If you have a corporate credit card, you cannot use it to purchase clothing or groceries, unless it is a true business expense. Once you use your corporate card as your personal charge card, you lose your limited liability protection the corporation offered you. This is known as piercing the corporate veil. Since you are not treating the business as a business, a creditor that obtains a court judgment against you, can look past the corporation status and attach assets you personally own, such as your house.

Limited Liability Company (LLC)

An LLC is a bit like a corporation because it provides limited liability protection for business debts and claims. However, when it comes to taxation, LLC’s are more like partnerships – the owners of the LLC pay their share of the business income on their personal tax returns. An LLC might be more preferable than a corporation because there are fewer corporate formalities. Corporations must hold regular meetings of the board of directors and shareholders, keep written corporate minutes and file annual reports with the state. On the other hand, the members and managers of an LLC need not hold regular meetings, which reduces complications and paperwork.

The primary reason people incorporate their business or form an LLC is to protect their personal assets from the claims of the business' creditors. A corporation or an LLC by their very nature, have "limited liability". As a sole proprietor or partner, you have "unlimited liability" to your creditors and, therefore, all of your personal assets are at risk if the business fails, is sued or is unable to pay its debts.

Many individuals today are self employed. As a business grows and prospers, the risk of liability to third parties also grow. Business customers, employees and creditors may bring suits against you personally. Your Fictitious Business Name will not protect your personal assets (i.e., home, car, savings accounts). The moral of the story…if you own a business, incorporate! Protect your yourself and family from personal liability.

Alon Darvish, Attorney at Law
Copyright 2006
All Rights Reserved

About the Author
Alon Darvish is a Business, Real Estate and Estate Planning attorney assisting clients in the Beverly Hills and Los Angeles area. He also services on the ambassador committee of the West LA Chamber of Commerce. Mr. Darvish’s office is located at 9393 Wilshire Blvd., Beverly Hills, CA 90210. Alon may be contacted at (310)434-1994 or via e-email at: Alon@DarvishLaw.com.

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