Why an LLC or Corporation Alone Doesn’t Fully Protect a Business Owner from Liability

Are you a business owner that has chosen to form an LLC or a corporation? Rest assured you are not alone. According to Yahoo, 543,000 new businesses are started each day, and women in entrepreneurship grew by 114% according to Fundera.

Out of the 543,000 businesses that are started each day, many of them were LLC’s and corporations.

Don’t Co-mingle Money

Business owners who form LLC’s and corporations do so for the limited liability protection. However, did you know the protection is as good as the steps taken after the entities are formed? For example, a business owner may not be aware of the importance of having a business bank account. This type of account must be separate from the owner’s personal account. If a business owner does not keep these accounts separate, this is known as co-mingling and can cause serious liability issues.

The IRS and Your Business

Another important aspect to consider is the election status given only by the IRS. A business owner is notified about this election status provision when the EIN number is applied for.

An LLC that is single member will be treated by default as a sole-proprietorship by the IRS. A corporation will be treated as a C-Corporation by default. It will be taxed at the highest possible tax rate. Therefor, it is important to request an election that will benefit your business tax-wise in the long-run.

The IRS will either grant or deny your business the elections afforded through the IRS, and you will receive a letter in the mail notifying you of your business’ election status after you file the proper forms and the IRS completes the processing of your company’s information. The time limit to apply for a specific election for a new business is usually two months and fifteen days – specifically for S Corp election. You risk being assessed penalties if the paperwork for election isn’t filed in a timely manner.

Credibility, Credit, and Limited Liability

Business owners are oftentimes unaware of business credibility and business credit. These two things are not one and the same, yet they limit a business owner’s liability significantly, because the business will have its own identity apart from the owner. This identity is built on the company’s EIN number and not on the owner’s SSN.

Business credibility is something that is looked at by creditors, lenders, and vendors. It is also looked at by customers. A credible business will limit the liability of a business owner and when coupled with successful marketing will grow a company’s revenue exponentially.

Business credit is the foundation of a credible company. It is the credit that is reported on the company’s three business credit profiles when a company pays its debt on-time. When this credit is extended without a personal guarantee, it is limiting the liability of the owner and building the company’s creditworthiness.

The Thought of Not Having A Credible Company is Disturbing

It is important to speak with your consultant, tax professional, and legal professional when establishing your business. The information contained in this article is for informational purposes only and is not to be taken as legal or tax advice.

If you want more information about building the credibility of your company specifically you may arrange a free fifteen minute consultation by filling in your name, email address, and phone number in the box below.




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