If you are a sole proprietor or part of a business partnership, you and the business are essentially the same entity. As a result, any debts that are incurred by the business are considered to be your personal debts. Plus, if you have a partnership, your personal assets would be in play if your partner or one of your employees was to be accused of negligent actions that caused damages.
To protect your personal assets, you could form a limited liability company. Generally speaking, if the business was to fall into debt and face legal actions from creditors, your home, your personal bank accounts, and other property that you own outside of the limited liability company would be protected. Your property would also be out of play if the business partner, the business itself, or someone that works for you was the target of a negligence lawsuit.
A corporation would protect assets in this manner. However, establishing a corporation can be complicated and expensive, and there is a lot of paperwork involved. You also have to hold annual shareholder meetings, and there are fees that must be paid to the state. With a limited liability company, things are much simpler, so it will usually be the right choice for smaller businesses.
There are tax advantages when you establish a limited liability company. You don’t have to pay personal taxes and separate business taxes. A limited liability company owner will enjoy “pass-through” taxation, so you can claim LLC profits and losses on your personal tax returns.