Many small business owners do not necessarily think about their financial liability when they first start their company—they tend to focus more on market research, securing funding and building up the infrastructure of their new business. However, it is important to understand the financial risks you face as the owner of a new company.
If you are a sole proprietor, those risks are significantly greater, because there is no structure standing between you and your business. If your company were to be sued and the business was unable to pay, the court would come after you and your own personal assets.
Structures that will reduce your financial liability
Fortunately, there are ways you can reduce the liability you face as a small business owner. The best way to do so is to establish your business in a structure that includes some liability limiting capabilities.
- S Corporation: The S Corporation is a great option for smaller business to reduce their liability while also being incorporated. There are other additional benefits to this structure, including pass-through taxation, but you will be required to start a board of directors, have annual board meetings and file extra paperwork to ensure your compliance.
- The limited liability company (LLC): This is the most popular option for small business owners to limit their liability and protect their personal assets. The same benefits as the S Corp exist in this structure, but there are fewer regulatory requirements and less paperwork involved. However, if you decide you will seek funding form outside investors, you’ll likely find those investors want you to be incorporated, so there is an extra challenge in that regard.
However, it is important to note that even if you do create an S Corp or an LLC, you are not completely protected from financial liability. There are several circumstances in which your assets could become vulnerable, including if your business entity itself is noncompliant with federal rules, if you decide you will personally guarantee a business loan, if you sign a business contract under your name or if you commit a crime.
Therefore, your best bet to avoid any chance of being liable financially is to work with an attorney. Your business attorney can provide you with advice about how to act in certain situations and how to set up your company in a way where you do not have to constantly have this financial liability hanging over your head.
For more information about reducing your liability as a small business owner, contact a knowledgeable corporate planning lawyer in the U.S. Virgin Islands.
J. Nash Davis is an Associate Attorney in the Corporate, Tax and Estate Planning Practice Group at BoltNagi PC, a full service business law firm serving the U.S. Virgin Islands.