You have developed a rock-solid product or service to sell. You’ve done the legwork of gathering start-up capital. You’ve done your market analysis. Now you’re ready to form your business and start earning dollars. But when it comes to choosing a business form, you’re worried about personal liability. How can you know whether an LLC, a general partnership, an LLP or a corporation is best for your particular situation?
Considering the risk of liability
Every business form comes with unique advantages and disadvantages that you need to consider. Some forms might be better suited for a particular business than others, due to the nature of the business and what kinds of services it offers.
One of the biggest factors you should consider is liability. Is your business one that involves a lot of risk? Can you foresee customers bringing a lawsuit against your company in the future? If so, it’s probably best to steer clear of a general partnership.
General partners are ultimately personally liable for the debts and obligations of the partnership. That means that, if a customer were to win a lawsuit against your partnership, you would have to use partnership assets to satisfy that judgment. If those partnership assets aren’t enough to cover what you owe, you and your partners will have to make up the difference out of your own pockets, according to your level of ownership in the company.
If you still want a partnership, you could consider a limited liability partnership (LLP). This is similar to a general partnership, but all partners have liability protection. What this means for your company in the case of a lawsuit is that the partnership’s assets would be used to pay the judgment, but the opposing party won’t be able to go after your personal assets.
Limited liability companies (LLC) and corporations offer personal liability protection similar to LLPs, but with different structures for the day-to-day operation of the business. It’s important to note that none of these forms protects a partner or director from liability of they engage in gross negligence or intentional wrong-doing. They’re meant to protect people who try to carry out their business in good faith.
If you are considering which form is best for your business, it could be a good idea to consult an experienced business law attorney. They will be able to assess your particular situation and provide you with a complete list of the pros and cons of each choice, so that you can have maximum protection against personal liability in case of a lawsuit.