I received a question from a reader the other day in regards to whether product liability insurance is necessary for a business even if one is protected by limited liability via an LLC or corporation. Specifically, he wanted to know whether it was worth paying for insurance for a pass through entity like an LLC or S Corp which carries no profits within the business. Whenever someone asks me this question, I always say yes no matter the nature of the business but it largely depends on your risk tolerance.

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Especially if you are running a business in the United States, the chances of getting sued are higher than you think and it really doesn’t take much for someone to take you to court.

There’s also a common misconception when it comes to limited liability with an LLC or corporation that most people may not be aware of. …

This is part 1 of a 7 part series on how to start a small business.

Most people who aspire to start their own business already have some idea about the different corporate structure options available to them. And it’s a well known fact that most business owners choose their legal structure based on one criteria: limited liability for business debts.

For the purposes of this guide, rather than rehash all of the nitty gritty that you can simply read about in any book, this guide will try to summarize and simplify the decision making process for you. In addition, I will also discuss the reasons why we chose to form an LLC for our company.

Small Business Startup Guide

Introduction
Part 1: Deciding On A Corporate Structure
Part 2: Small Business Trademark Issues
Part 3: Small Business Regulations and Permits
Part 4: Small Business Taxes
Part 5: Small Business Hiring

I think of limited liability companies or LLCs as a hybrid between an S corporation and a sole proprietorship. LLCs, like S Corps and sole proprietorships, are pass through tax entities in that taxes on income are filed under an individual’s income tax return. The LLC also provides limited liability protection. The main advantage of LLCs is that it can provide you with limited liability protection without the hefty paperwork requirements of corporations. So what questions should you ask yourself?

Corporate Structure

Legal Structure Overview
Sole Proprietorship
Limited Liability Company
S Corporation
C Corporation

Do You Really Need Limited Liability?
The LLC is very attractive from a limited liability standpoint mainly because of the informal low cost aspect of running one. Compared to a corporation, there is much less paperwork involved and its extremely easy to form and dissolve.

However the liability protection, like a corporation, comes at a cost. All states treat …

I used to think that C corporations were meant only for large successful companies. When I think of C Corps, I think of big names like Microsoft, Google and IBM and definitely not a small business. In reality, it’s pretty easy to become a c corporation.

Anyone can file for C corporation status, but typically small businesses shy away from C corps until they are solidly profitable. Because the C corporation is probably the most complicated corporate structure that you can possibly have, there are a lot of questions that you should ask yourself before you decide to become one.

Corporate Structure

Legal Structure Overview
Sole Proprietorship
Limited Liability Company
S Corporation
C Corporation

Are You Ready For the Paperwork?
C corporations require the most paperwork of all of the corporate structures. There are complicated tax rules involved and legal and accounting costs as well. In short, a C corp is probably the most …

In general, S Corporations are valuable when you require the limited liability protection that a corporation provides and when your business is not profitable. S corporations are pass through entities which means that all income is passed directly to the shareholders who pay taxes under their own individual income tax rates. As a result, the S corporation itself does not have to pay any federal income taxes. Before electing to create an S corporation, here are a few questions that you should be asking yourself.

Corporate Structure

Legal Structure Overview
Sole Proprietorship
Limited Liability Company
S Corporation
C Corporation

Do You Absolutely Require Limited Liability?
Filing for an S corporation requires a significant amount of paperwork compared to a sole proprietorship. Even though the income for an S corporation is passed directly to the individual, a separate tax return must be filed because an S corp is treated as a separate tax paying …

If you fear excessive paperwork and you want to keep it simple, then a sole proprietorship is the way to go. Establishing a sole proprietorship is so easy, that you don’t have to do anything at all. By default, the IRS considers all business owners sole proprietors. Because going with a sole proprietorship is stress free and easy, many people stay as solos early on. Since everyone has their own situation however, below are a few questions you should ask yourself.

Corporate Structure

Legal Structure Overview
Sole Proprietorship
Limited Liability Company
S Corporation
C Corporation

Is Liability a Concern?
Are you selling items or services that are prone to getting sued? For example, do you sell any food articles or anything that could be potentially dangerous? If you require liability protection, then sole proprietorships are definitely not for you. Since the US is such a litigious country, anyone can sue you …