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How To Determine What Business Structure Is Best

by Brett Backues on January 20, 2012
The most common question I hear from small business owners and entrepreneurs seems to be: What type of business structure makes sense for my new enterprise? As a CPA and trusted advisor to many business owners, my answer is always the same--it depends.  
Most small business owners weigh the advantages between remaining a sole proprietorship, creating a partnership, forming an LLC, or going for broke as a full-fledged corporation. The decision ultimately revolves around two major concerns: protection from liability and minimizing taxes.  My answer to these brave entrepreneurs depends on three totally independent factors:
1. what type of business they envision
2. the type of industry they’re in
3. the status of their individual tax situation
The structure the owner eventually selects for their business will provide its own liability protection, or, as it’s known in the CPA circles, the corporate veil.  The first goal of any corporation is to create a legal entity that will separate the owner and their family from the liabilities the business may incur. Without the legal separation, the personal assets of the founder could be at risk if somebody files a lawsuit against the business. Unfortunately, we live in a litigious society and the risk of future legal issues are all too real. This is especially true in certain highly visible industries.  Creating a corporation provides an extra layer of protection.
There are three factors that need to be addressed about liability protection and the corporate veil strategy.  First, I have been advised by several attorneys that the protection provided by either an LLC or a corporation is pretty much the same.  (Your own attorney may not agree and want to explain the advantages of each.)   It is important to note that neither a sole proprietorship nor a general partnership will protect your personal assets if you are hauled into court.   Secondly, a corporate veil will not replace a commercial liability insurance policy.  Even the most elaborate corporate veil can be penetrated by a creative lawyer.  
That leads to my third point:  After the owner has formed a separate business entity for liability purposes, the formal nature of an actual corporation requires constant maintenance to remain viable.  If the record keeping and corporate by-laws are not followed to the letter of the law, the owner’s personal assets may still be at risk. Government regulations frown on comingling business assets with personal money. That means the CEO can never use the company debit card to go grocery shopping or take the kids to the movies.
The personal bank account of an owner could also be hung out to dry if the corporate tax returns not filed on time or if the busy executive fails to renew the company’s business license on time.