Choosing a Legal Entity – Part 2

Choosing a Legal Entity – Part 2

Sole Proprietor

This is the least expensive of your options but it also comes with the most exposure to risk. As a sole proprietor, all of your personal assets are at risk should a student bring a lawsuit against you. When we speak of all your personal assets that means everything you own from your car to your house and everything else in between. If the student wins the lawsuit you could be subject to paying the award and most likely their legal fees. If this occurs the court can compel you to sell your car, boat, liquidate bank accounts, or “tap the till” (confiscate future sales) to satisfy the settlement.

Once these resources are exhausted, the court can place a lien on your home to force the settlement to be paid (with interest) when you sell your home. Finally, and perhaps most importantly, your personal credit will be ruined because you, not your business, is liable for the debt. Everyone’s position is different, which is why you need to talk to your attorney.

Limited Liability Company

The LLC is a popular form of protection amongst many firearm instructors. The concept is the company owns its assets and debts, separate and removed from your personal belongings. If a student brings a lawsuit they are only entitled to what the business owns and nothing more.

If they win and bankrupt the business, only the business files bankruptcy, not you personally, which protects your credit rating. LLCs are also popular because the tax filing requirements with the Internal Revenue Service (IRS) are far less complicated than the full-blown “C Corp” model. Your attorney will be able to assist you in whether a LLC is the right choice for you.

Corporation

A corporation offers you the same protection as the LLC but becomes quite burdensome with IRS tax filings which must be filed in a timely manner; generally, on a quarterly basis. Miss a deadline and Uncle Sam hits you with a fine and some hefty interest fees. However, a Corporation can provide some additional layers of protection especially related to your personal asset protection strategy. Here again, your attorney would be the one to discuss this option.

S-Corporation

The difference between the S-corporation and the standard corporation is simply in how the income is taxed and reported. With the full corporation, the corporation is taxed based on its income. With the S-corporation the income is taxed as personal tax for the individual owners. S-corporations tend to get a better break on taxes but all the same reporting processes still exist. Your tax accountant would be better to assist you should the attorney recommend a corporate entity.

Non-Profits

Non-profits are generally reserved for clubs and organizations. Do non-profits make money? Ask the Boy Scouts, YMCA, Boys and Girls Club and others. Yes, non-profits make money otherwise they couldn’t build those beautiful facilities, pay salaries, and expand. The difference is the shareholders or owners of the non-profits stock do not profit personally from the company. They can, however, be an employee of the company and receive a reasonable salary for their work. Non-profits are highly regulated and come under heavy scrutiny by the I.R.S. In theory, your non-profit could have a notable cause, such as training veterans to re-enter the work-force. This is a very complicated mode of operations and an attorney and tax accountant will definitely need to be involved.

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