Some businesses present their owners with risks, including exposure to personal liability (PL). The PL exposure level of a business is dependent on its legal form. The different legal forms, or structures, of businesses are sole proprietorship, limited partnership, limited liability company (LLC), general partnership or corporation (Clarkson & Miller, 2012; Mancuso, 2015). This paper explores the levels of PL that the owner of Tinker & Tailor’s Home Security Service business will be exposed to if he or she opts to adopt any of the forms. The paper examines how one can reduce the PL exposure levels associated with the different organizational forms. As well, the paper explores why the LLC form may be the best for a business.
Comparison of the Personal Liability Exposure Levels of Different Business Forms
Business |
Personal Liability Exposure |
Relative Personal Liability Exposure Compared To The Other Business Forms |
| Tinker & Tailor’s Home Security Service (Sole Proprietorship) | If Tinker & Tailor’s Home Security Service’s owner runs it as a sole proprietorship, he or she will be exposed to unrestrained, or unlimited, PL with regard to all its debts and contractual breaches (Emerson, 2009; Strauss, 2012). The owner will be responsible for the recruitment of the business’ employees and will have unlimited PL for the employees’ acts. | Compared to all the other business forms, sole proprietorship exposes business owners to the highest level of PL. |
| Tinker & Tailor’s Home Security Service (General Partnership) | If Tinker & Tailor’s Home Security Service’s owners opt to run the business as a general partnership, each of them will be exposed to unrestrained, or unlimited, PL with regard to the business’ debts and contractual breaches. Each of the owners will be responsible for the recruitment of the business’ employees and will have unlimited PL for the employees’ acts. As well, each of the owners will have unlimited PL for the each of the other owner’s acts (Seaquist, 2012; Strauss, 2011). | Compared to all the other business forms, general partnership exposes business owners to the second highest level of PL, after sole proprietorship. |
| Tinker & Tailor’s Home Security Service (Limited Partnership) | For the business to operate as a limited partnership, no less than one of the owners ought to have unrestrained PL for the business’ debts and contractual breaches, employees’ acts, and the other owners’ acts as if he was in a general partnership business. No less than one of the owners ought to have restrained, or limited, PL with respect business’ debts and contractual breaches, employees’ acts, and the other owners’ acts. Notably, only the owners with unrestrained PL are allowed to manage the business. | For the owners with unrestrained PL, a limited partnership exposes them to as PL as a general partnership would. For the owners with restrained PL, the limited partnership exposes them to much lower PL level than a general partnership (Emerson, 2009; Strauss, 2012). |
| Tinker & Tailor’s Home Security Service (Corporation) | Except in very exceptional circumstances, which are rather rare, all the business’ owners will enjoy restrained, or limited, PL if they operate it as a corporation. The limited PL will be with respect to the business’ debts and contractual breaches. As well, the limited PL with be with respect to employees’ acts and the other owner’s acts. In various states, however, each of the owners does enjoy limited PL regarding claims made by his or her personal creditors. | Compared to all the other business forms, the corporation form exposes business owners to the second lowest level of PL, after LLC. |
| Tinker & Tailor’s Home Security Service (Limited Liability Company) | Except in extremely exceptional circumstances, which are rather rare, all the business’ owners will enjoy restrained, or limited, PL if they operate it as a LLC. The limited PL will be with respect to the business’ debts and contractual breaches. As well, the limited PL with be with respect to employees’ acts and the other owner’s acts (Clarkson & Miller, 2012; Mancuso, 2015). Besides, in all states, each of the owners enjoys limited PL regarding claims made by his or her personal creditors. | Compared to all the other business forms, LLC exposes business owners to the lowest level of PL. |
How to Reduce the Personal Liability Exposure Levels of Different Business Forms
The PL exposure levels associated with sole proprietorship can be reduced in a number of ways (Abbott, Pendlebury & Wardman, 2007). The ways include ensuring that the business owner executes all his or contractual obligations and terms of the agreements regarding the business and ensuring that employees are not exposed to any danger at the business’ premises. Others are adhering to all the applicable laws, and meeting the business’ obligations like paying for rental charges in a timely manner (Emerson, 2009; Strauss, 2012). The PL exposure levels associated with a general partnership or a limited partnership can be reduced by ensuring that the business owner executes all his or contractual obligations and terms of the agreements regarding the business and ensuring that employees are not exposed to any danger at the business’ premises (Seaquist, 2012; Strauss, 2011). The levels can as be reduced by adhering to all the applicable laws, and meeting the business’ obligations like paying for rental charges in a timely manner.
The PL exposure levels associated with a corporation can be reduced adhering to all set legal formalities relating to how the corporation is run, not using the corporation’s funds on personal needs or on other businesses, and not sharing the corporation’s resources like office space with other businesses (Abbott, Pendlebury & Wardman, 2007). The levels can as well be reduced by ensuring that no decisions are made in the name of the corporation to benefit its principal personally and directly. The PL exposure levels associated with a LLC can be reduced adhering to all set legal formalities relating to how the LLC is run, not using the LLC’s funds on personal needs or on other businesses, and not sharing the LLC’s resources with other businesses. The levels can as well be reduced by ensuring that no decisions are made in the name of the LLC to benefit its principal personally (Clarkson & Miller, 2012; Mancuso, 2015).
Why LLC is the Best Organizational Form for a Business
For any given business, the LLC is the best organizational form principally since it helps the business maximize its strategies for protecting the business’ assets and related interests (Gillies, 2004; Steingold, 2014). The form provides remarkable estate planning, as well as tax, options. The form can be operated rather flexibly (Seaquist, 2012; Strauss, 2011). As noted earlier, compared to all the other business forms, LLC exposes business owners to the lowest level of PL.
A LLC is quite easier and cheaper to form than a corporation. Notably, the criterion for establishing a LLC is clearly laid out in law (Abbott, Pendlebury & Wardman, 2007). A LLC is easier to manage than a corporation or a partnership since the rules set out to guide how a LLC operates are less burdensome and more relaxed that the ones guiding how a corporation or a partnership operates. By default, LLCs are legally taken as partnerships with respect the meeting of federal tax obligations (Clarkson & Miller, 2012; Mancuso, 2015). LLC’s owners report the LLC’s income on their personal tax returns. Often, that reduces the LLC’s tax obligations.
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