This article is the third in a series by Tax Expert
Wayne Davies on the advantages of incorporating your small
business or self-employment activity.
It Can Happen To You:
Why Any Sole Proprietorship Is A Risky Business
How To Avoid Double The Trouble:
Why A Partnership Can Be Twice As Dangerous
Three's Company: How To Move From Unlimited Liability
to Limited Liability
For the small business owner or self-employed person,
both the Sole Proprietorship and the General Partnership
put you in the world of Unlimited Liability.
All your personal assets are at risk. A business-related
accident or lawsuit could literally wipe you out.
How do you move from the world of Unlimited Liability to
Limited Liability? By forming a "C" Corporation, an
"S" Corporation, or a Limited Liability Company (LLC).
For now, I'm leaving the Limited Partnership out of this
discussion. I'm assuming that you want a say in the
day-to-day management of your business.
If so, then both the General Partnership and the Limited
Partnership are not a good Choice of Entity for you.
Why is that? Because if your business is a General
Partnership, then you automatically have unlimited
liability. And if your business is a Limited Partnership
and you want management control, then you're going to have
to be the General Partner, and again, you'll have unlimited
There are certainly business situations for which the
Limited Partnership is a "good fit" (for example, if real
estate is involved). But that's beyond the scope of
So, back to my original question:
How do you move from the world of Unlimited Liability
to Limited Liability? By forming a "C" Corporation,
an "S" Corporation, or a Limited Liability Company.
Having made such a bold statement, let me also say this:
I am a firm believer that when it comes to this Choice of
Entity issue, one size does not fit all!
So let me add a strong disclaimer:
There certainly are situations where a "C" Corporation, an
"S" Corporation, or a LLC is not appropriate.
But generally speaking, for many Small Biz Owners and
Self-Employed People, one of these three entities is
often times the best fit.
If you want the protection of limited liability, you've
got to choose one of these three entities. Remaining a
Sole Proprietor or a General Partnership just doesn't make
much sense -- you are putting yourself, your family,
and all your personally owned assets at risk.