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Business formation types that limit personal liability

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When you establish your own small business, one of the most significant steps in the process involves determining what type of business structure might be best, given your needs.

While there are many considerations that typically go into making this decision, one thing you will probably want to consider is whether you could be personally liable, should someone sue your business.

In other words, if someone files a lawsuit against your company, are your home, car or other assets at stake?

All businesses have certain areas where they can be held liable, even if the risks associated with the business are not readily apparent, as they may be if you operate, say, a taxi or catering company.

Certain business formation types actually reduce the amount of personal liability you have in your company, though, and these include the S corporation and the limited liability company.

The S corporation

While an S corp involves a certain level of dedication, because your company must maintain an active board of directors and hold annual meetings, among related requirements, this is a common business formation choice for today's small business owners who want to limit personal liability. An S corp also offers a number of benefits when it comes to filing taxes, making it increasingly appealing to some small business owners.

The limited liability company

Business owners seeking a formation type that limits personal liability without involving considerable red tape might be wise to consider the limited liability company. There are less rigid rules associated with this type of business formation, but it offers some similar benefits to the S corp, in that it reduces your personal liability in your business.

Remember, regardless of the type of business formation you establish, you must stay compliant in order to reduce personal liability. The steps you must take to stay compliant will vary based on the formation type you select, but failing to maintain compliance exposes you and your personal assets to potential lawsuits.

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