Business Entity Basics

Business Entity Basics: The Liability Shield

Business owners who have formed a business entity know that the process of doing so can sometimes be complicated and confusing. A formal entity isn’t required to do business in Nevada, but operating without one is financially risky. That’s primarily because legal entities provide a liability shield commonly called the corporate veil.

In most instances, the corporate veil protects business owners from the debts and liabilities of the business. However, the breadth of the corporate veil varies from one form of entity to another. For example:

• Corporations: Corporations, along with LLCs, normally provide the broadest liability protection for owners. Except only in very limited circumstances, corporate shareholders are not personally liable for the corporation’s debts or its wrongful acts and omissions.

• Limited Liability Companies (LLCs): Like corporations, LLCs offer business owners the broadest liability protection possible. Thus, with few exceptions, LLC owners (like corporate shareholders) aren’t personally liable for the company’s debts or wrongs. Furthermore, LLCs offer more flexibility and require fewer formalities than corporations, which typically make them the entity of choice for small businesses.

• Limited Partnerships (LPs): Limited partnerships only offer some of their owners liability protection. Of the two types of LP owners, only limited partners are shielded from the debts and liabilities of the partnership. General partners, on the other hand, aren’t afforded much, if any, liability protection.

• Limited Liability Partnerships (LLPs): In a limited liability partnership, each owner is shielded from personal liability for his co-owners’ mistakes. However, every owner is responsible for the general obligations and liabilities of the company. Nevertheless, because the law sometimes prohibits professionals like doctors, lawyers, and engineers from doing business as an LLC or a corporation, LLPs are still commonly used as liability-limiting vehicles.

Choosing an appropriate business entity and correctly structuring it to protect your interests and effectively limit your personal liability is much easier with the help of competent professionals.