J.K. Lasser's Small Business Taxes 2013: Your Complete Guide to a Better Bottom Line

Factors in Choosing Your Form of Business Organization

Throughout this chapter, the differences of how income and deductions are reported have been explained, but these differences are not the only reasons for choosing a form of business organization. When you are deciding on which form of business organization to choose, tax, financial, and other factors come into play.

Personal Liability

If your business owes money to another party, are your personal assets—home, car, investment—at risk? The answer depends on your form of business organization. You have personal liability—your personal assets are at risk—if you are a sole proprietor or a general partner in a partnership. In all other cases, you do not have personal liability. Thus, for example, if you are a shareholder in an S corporation, you do not have personal liability for the debts of your corporation.

Of course, you can protect yourself against personal liability for some types of occurrences by having adequate insurance coverage. For example, if you are a sole proprietor who runs a store, be sure that you have adequate liability coverage in the event someone is injured on your premises and sues you.

Even if your form of business organization provides personal liability protection, you can become personally liable if you agree to it in a contract. For example, some banks may not be willing to lend money to a small corporation unless you, as a principal shareholder, agree to guarantee the corporation’s debt. In this case, ...