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Potential Liability is a Consideration in Business Formation

F. Michael Ayaz

Entrepreneurship is alive and well in California with many new businesses cropping up every day. Some are large, well-planned and well-funded operations that are years in the making; some are one-person gigs that open for business on a shoestring. One thing these and all businesses have in common, whether the owners realize it or not, is that the type of business formation the enterprise operates as will have a major impact on its future. There are four major types of business entities: sole proprietorships, partnerships, limited liability companies and corporations.

The four types are different, and all have their own pluses and minuses, but in one important respect, sole proprietorships and partnerships are more similar to each other as opposed to a commonality shared by LLCs and corporations. This issue is the potential personal liability of the business owner. Sooner or later, every business is likely to experience a situation where some mistake was made or something did not go as planned, and the business owes money to rectify the matter. Small business advisors caution that in some circumstances, if the liability is greater than the ability of the business to pay, the personal assets of the owner may be at risk to satisfy the debt.

This is true with both sole proprietorships and partnerships. This can be disadvantageous especially for partnerships because not only is each partner liable for their own mistakes, but each is personally liable for the other’s mistakes as well. For both LLCs and corporations, there is some degree of protection whereby business owners are, for the most part, shielded from creditors’ actions.

Many considerations come to play in owning a business, and as with most issues, prevention and foresight come at less cost than reacting after the fact. The California Business Formation Blog blog may explain how an attorney may advise on all facets of entrepreneurial law.

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