Limited liability is one of the most misunderstood parts of business. To understand it well, you must first understand that it was originally introduced to protect investors and not necessarily the managers of a company.
This basically means that, as a Microsoft shareholder, you will not receive a demand for payment of whatever your legal judgments make you pay each month. You can only lose the money you paid for your actions in the first place. Now a large company with thousands of investors is very different from an average one or two person company. First, you are likely to be the sole shareholder (s) as well as the officer (s) of the company.
What can you be responsible for?
Generally speaking, the normal things that a business can be liable for are accidents and debts.
For the accident part, you really need some kind of liability insurance if there is any kind of risk involved. This could be a stupid thing like dropping a printer at someone’s foot on a client’s site if you are a consultant.
Debt may seem simple, like a business loan or a credit card. However, you should remember that it also includes things like unpaid bills, unpaid taxes, demands for refund of fees if your client makes a fuss.
Through a business, you may be able to skip paying your unpaid bills and ignore your clients without having to sell your home, but the tax collector will most likely start taking action against corporate officials. The majority
corporate credit cards or small business loans also require collateral
of the officers or principal shareholders. So you don’t really protect yourself
so much.
Responsibility of officers to shareholders
Remember that if you are an officer, you have a fiduciary duty to your shareholders.
So if you have other shareholders besides yourself, you can be personally sued for
mismanage the company. This is how you know limited liability.
Responsibility for the actions of the partners
LTD’s, Inc’s and LLC’s provide a greater amount of protection against your
partner shares than a regular association. This is where there is a clear
benefit.
I stick with my recommendation on using LLCs for real money generating businesses with more
of a partner. To keep things safe, invest the money and register your LLC when you’re getting serious.
Limited liability has nothing to do with tax planning
Remember to separate tax planning from other issues like limited liability, governance, etc. For a single person, operations save money and complications
unless there is a real tax advantage in creating a personal holding company
with an Inc. or LTD. LLCs do not provide real tax benefits in this case. An LLC can
be easily structured where each partner has their share through an Inc as well.
This is ideal as each person has different tax requirements.
I’ll cover the basics of your business tax planning in another post one day,
but simply speaking until breakeven, in most jurisdictions there is a
distinctive benefit when deducting your loss from other income (such as salary).
When you break even, you can incorporate a personal business to maintain profits.
Here you pay an often lower corporate tax and have other benefits.
As long as you save money on the business, you have a tax benefit. If you
pay part of your earnings in salary and / or dividends that pays the most income taxes
we say. So there really isn’t much of a benefit to the small average.
entrepreneur if you need all this money to live. How can you imagine this
It is by no means complete information and you should check with accountants about
this. If you can’t afford one, you’re probably not yet at the point where
you need a personal corp.
Remember that I am not an attorney and you should always consult with your attorney if you have specific questions about liability.
