Business Entity Basics Part I: What is a Business Entity and Why do I Need One?

By Andrew Randol - January 9, 2019 - Corporate & Business

What is a Business Entity?

At its core, a business entity is a fictitious person invented by the law in order to allow people to conduct business. Like a natural person, a business entity can own property and assets, purchase and sell things, enter into contracts, break laws, pay taxes, and sue and be sued in court. The entity exists separately from its owners.

Thus, if Company A purchases a dump truck, the truck is owned by Company A and not by Company A’s owners. If the dump truck is stolen, the insurance money is paid to Company A and not to Company A’s owner. If the insurance company refuses to pay under the policy, then Company A would sue the insurer in court, rather than the owner of Company A suing personally.

Are the Owners of a Business Entity Personally Liable For its Debts?

Maybe. This depends on what type of business entity you created to organize your business. Generally speaking, business entities can be divided into two categories, limited liability entities and non-limited liability entities. The simplest example of a non-limited liability entity is a partnership.

A partnership is a type of business entity that can do all of the things discussed above, such as owning property and suing in court. However, because a partnership does not provide limited liability protection, its owners are personally liable for the debts of the partnership.

For instance, let’s assume Company A is a partnership and it buys a dump truck as in the example above. The dump truck is involved in a car accident and an injured motorist sues Company A and wins a judgment for $100,000. Even though the $100,000 judgment is a debt of Company A, its owners are responsible for this debt.

Limited Liability Entities

The most common examples of limited liability entities are corporations and limited liability companies (LLC for short). Like a partnership, corporations and LLCs are fictitious persons who can own property and sue in court. However, unlike partnerships, the owners of corporations and LLCs are not personally liable for the debts of the entity.

In the example above, suppose Company A is a corporation or an LLC. The owners would not be personally liable to pay the $100,000 judgment. The injured motorist would be able to collect against all of the assets of Company A, but even if they cannot cover the entire $100,000 judgment, the owners are not personally liable for this debt.

This is assuming the injured motorist does not have another legal theory under which the owners of Company A may be liable. If the one of the owners of Company A was behind the wheel in the accident and found liable, then the driver-owner could in fact be liable for some of those claims. But this would be the owner’s personal debt, not the debt of Company A. If an employee of Company A is the driver, then employee A may be held liable for the accident as well as Company A. But in this example, Company A’s owners are not personally liable.

If you haven’t already deduced the lesson from this very simple example, any competent Columbus business litigation lawyer would advise a client to opt for a limited liability entity, such as a corporation or an LLC, over a non-limited liability entity. For all intents and purposes, non-limited liability entities are antiquated.

Why Do I Need a Business Entity?

While there are a number of important reasons to organize your business under a business entity, a competent Columbus business attorney would stress the vital role business entities play in shielding owners from the debts of the company itself. Leaving your job to start your own company is a huge risk for most. Don’t compound this risk by failing to take simple steps to protect yourself from being personally liable for the debts of your business. Contact our Columbus business law attorney to learn more about organizing your company under a limited liability business entity and other steps that are needed to financially protect yourself.

How do you choose between a corporation and an LLC?

Part II of Business Entity Basics will focus on how LLCs and corporations are taxed. Differences in taxation is how most choose between these two limited liability entities.

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