How to Protect Against Liability During the Business Formation Process

 Posted on October 06, 2021 in Business Law

Starting or expanding a business can be a great opportunity. However, business owners and entrepreneurs will need to consider a variety of legal and financial issues when doing so. Liability is one area of concern for many business owners, but fortunately, if a business is structured correctly, an owner or partner can ensure that they will not be held personally liable for business debts. During the business formation process, which may take place when a business is initially founded or when an existing business is restructured, an owner will want to select a business entity that will provide them with the protection they need.

Choosing the Right Business Structure

In many cases, a business owner will first form their business as a sole proprietorship, or if there are multiple owners, a business will be formed as a general partnership. In these cases, there will be no separation between assets owned by the business and the personal assets of the owner or partners. While this may allow for more flexibility when starting a business and provide an owner with more control over business operations, it will not provide any protection against liability. This means that an owner or partner may be held personally responsible for business debts or lawsuits against the business.

In some cases where a business has multiple owners, it may be beneficial to create a limited partnership. In these cases, one partner will be a general partner with unlimited liability, and other partners will be limited partners who are protected from liability. A business may also be a limited liability partnership (LLP) in which all partners are limited partners. This will provide them with protection against being held liable for business debts, and one partner will not be liable for another partner’s negligence, misconduct, or malpractice.

A limited liability company (LLC) is another type of business structure that provides protection against liability. An LLC may have a single owner or multiple partners (who are known as members). Members will generally not be liable for business debts as long as they are sure to maintain separation between themselves and the business, such as making payments through an account owned by the business rather than using a personal checking account.

Establishing a business as a corporation is another way to protect against personal liability. Since a corporation is a legal entity that is separate from its shareholders, it will provide owners with the strongest protections. Generally, a shareholder cannot lose more than the amount they have invested in a corporation. 

Contact Our Kane County Business Formation Lawyers

If you are planning to start a new business, or if you need to take steps to protect yourself from liability as the owner of an existing business, Ariano Hardy Ritt Nyuli Richmond Lytle & Goettel, P.C. can help you determine the ideal type of business structure to use. We will ensure that you follow the correct steps during the business formation process to address liability issues and ensure that your company can continue operating successfully in the years to come. Contact our Elgin business law attorneys at 847-695-2400 to arrange a complimentary consultation.

Sources:

https://www.sba.gov/business-guide/launch-your-business/choose-business-structure

https://www.pathwaylending.org/news-and-blog/news/business-legal-structures/

https://www2.illinois.gov/dceo/SmallBizAssistance/BeginHere/pages/stepbystepguide.aspx