Does your business need limited liability protection?
Starting a business is easier than you think. Have a good or service to sell? You have a business!
Sole Proprietorships and Partnerships are the easiest types of businesses to start. You don’t need to register them or file any state forms. It’s as simple as just starting to sell a good or service!
Really? So what's the catch?
While sole proprietorships and partnerships are easy to start, you will not receive limited liability. This means that you, as an individual, will take on the personal responsibility for all of your business actions.
How do you know if this type of business structure is right for you?
Let’s break it down!
Sole Proprietorships
Sole proprietorships are created whenever you as an individual start a business. It doesn’t have to be formal, it's really just the act of starting to sell goods or services. There are tons of sole proprietors out there who buy and sell things without ever putting into place other legal structures.
When you are a sole proprietor you get FULL decision making authority with business operations and financial decisions. This offers you a ton of freedom to run your business how you see fit.
However, this freedom comes with some risk. As a sole proprietor:
You are responsible for the tax burden
You are personally responsible for any business liability
Example
Fun Fact! I have my own honeybees and this past year, they produced over 200 pounds of honey – more than enough to sell if I wanted to. So, if I were to just start selling my honey at a little roadside stand, then I would have created a sole proprietorship. Since I have not set up any legal structure for my business, I would be personally responsible if somebody were to get sick from consuming my honey. This would all fall on me and if a lawsuit was involved, they could come after my personal assets.
Partnerships
General partnerships are similar to sole proprietorships, except there are 2 or more partners involved in the business. All partners have decision making authority and equally share the liability.
Typically when partnerships are formed there is a partnership agreement, however, while it’s advisable to have one, it is not required. This has potential for lots of risk.
Anyone considered a partner in the business will be held personally accountable for all business decisions — this includes your own actions within the business, as well as the actions of any other business partner.
Example
Let’s say that two physicians decide to start up their own practice and one of those physicians decides to over-bill patients. Now there is a Medicare fraud claim against the business. With a partnership, BOTH physicians are held accountable for the fraud. If there is any lawsuit brought against this business, each partner can be sued individually — even if only one acted criminally or negligently. Again, when you are personally liable it means they can come after your personal assets.
Are the risks worth taking?
While sole proprietorships and partnerships are easy to form, they come with a lot of risk. The best advice I can give you is to consult with an attorney as well as your accountant who can advise you on the tax issues and implications of having these types of businesses.
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We hope you found this estate planning information helpful. As a reminder, the information presented here is for general informational purposes only. You are unique, and legal advice should be tailored to your unique situation. Do not rely upon any information here as legal advice. This information is not intended to create, and receipt or viewing does not constitute, an attorney-client relationship. If you would like to learn more about how we can protect your family or small business, please contact us!
Cherish Legal is an estate planning law firm based out of Rockford, Illinois. We are licensed to practice estate planning in Wisconsin and Illinois. We provide virtual estate planning services to families and legal counsel to small businesses located. Our services include: wills, trusts, power of attorney, estate plans, guardianship, trust administration, probate, and asset protection.
