Building a Firewall Between Your Business and Personal Wealth
- posted: Jul. 28, 2021
- Business Formation
No matter what type of business you’re looking to launch, protecting your personal assets is a critical concern. Establishing a corporation gives startup owners the opportunity to take bold risks while limiting potential losses to the business itself. A knowledgeable Arizona attorney can advise on the benefits of corporations and other types of legal entities, as well as other risk management strategies.
An important step for business owners seeking to safeguard their private wealth is forming the right type of business entity. Corporations and limited liability companies (LLCs) both give owners a shield against business debts and court judgments, limiting their liability to the amount of their stake in the business.
Most corporations are treated as taxable entities separate from their shareholders, but owners can split their corporate profit between the corporation and shareholders, lowering the overall tax rate, because salaries and fringe benefits paid to owners as officers and employees may be deducted from corporate tax calculations as business expenses.
However, it is possible for a business entity to protect owners from personal liability without functioning as a separate tax entity. Closely held corporations may choose to be classified as Subchapter S corporations for tax purposes. This means business income is “passed through” to its owners and reported on their own personal federal income tax forms. In addition, the owners may deduct their share of the corporation’s business deductions to offset their income from other sources.
LLCs are customarily not taxed as separate entities, but recent IRS regulations now allow them to be treated as corporations for tax purposes. Another advantage of LLCs is that profit and loss can be apportioned differently than ownership interests.
However, this limited liability doesn’t protect owners and officers from being held responsible for corporate loans which they co-signed in their own names or judgments obtained against them personally for conduct linked to their business. Furthermore, a court may pierce the corporate veil and hold an owner liable in very limited circumstances where maintaining denying personal liability would result in fraud or injustice.
Another important way of protecting owners’ assets from business losses and judgments is through business liability insurance, not only for the entity itself, but for its owners and management.
At the Law Firm of Joseph M. Udall, PLC, we are ready to give you detailed information on how to choose and implement an asset protection and risk management plan that is right for you and your business. To learn more, call our Mesa, Arizona office at 480-500-1866 or contact us online to schedule a consultation.