Selecting the wrong business structure for your new venture can create a range of legal and financial problems. Entrepreneurs need to understand the risks associated with each structure to avoid costly mistakes.
It is important for business leaders to understand the issues that can arise by choosing the wrong structure. This will open the way to informed decisions and unobstructed operations in the future.
Personal liability
Choosing a sole proprietorship or partnership can leave personal assets at risk. If another party files a lawsuit against the business, of if the company goes into debt, creditors can pursue the business owner’s personal property. This could even include your home, vehicles and financial accounts. When forming a business, consider how the protection of a limited liability company or corporation can prevent significant personal financial loss.
Shared liability in partnerships
In a general partnership, all partners share liability. This means one partner’s mistakes or legal troubles can impact the others. For example, if one partner takes on excessive business debt or engages in illegal activities, the other partners could be equally responsible. Without the right structure, and you may find yourself liable for actions you did not personally take.
Tax complications
An unfitting structure can lead to unexpected tax burdens. For example, corporations face double taxation, where both the business and shareholders must pay taxes. In contrast, sole proprietorships, partnerships and LLCs benefit from “pass-through” taxation, where only the owners incur taxes on business profits. Failing to choose a tax-efficient structure can increase the overall tax burden.
By carefully selecting the correct business structure, Indiana entrepreneurs can avoid these common legal and financial pitfalls. Understanding the risks of each option is key to ensuring long-term business success.
