Protect yourself from your small business
February 17, 2012
Despite the economy, I have seen many people endeavoring in a small business lately. According to the US Census Bureau, Nevada has nearly 50,000 businesses. Over 55 percent of those businesses have four or fewer employees. Small business really is the backbone of our community. Many people work hard to operate their business, and to take care of their employees and family.
What many small business fail to do, however, is to take advantage of the different business entities available in the state of Nevada. Instead, these small businesses operate as sole proprietors or general partnerships. A sole proprietor is any individual operating a business directly, without forming a business entity or registering with the Secretary of State. Similarly, a general partnership is a group of people directly operating a business, without forming a business entity or registering with the Secretary of State. A general partnership may or may not have a contract defining the rights between the partners.
As a sole proprietor or general partnership, there is nothing that distinguishes the business from the individual. The individual must pay all the income and employment taxes directly. It leaves the individual little flexibility to minimize income taxes. On the other hand, a business entity often empowers the individual to plan their business and expenses in a way that minimizes the taxes owed to the government.
Additionally, there is nothing that keeps the liabilities of the business separate from the individual. There are many reasons that a business may have liabilities. These liabilities may arise from a contract – like a lease or loan — or from personal injury – like a claim for damage from a customer, or a worker’s compensation claim. As a sole proprietor or general partnership, if the business is sued then so is the individual. The individual’s assets and lifestyle are directly at risk of the business. This risk is magnified in a general partnership, where the acts of one partner exposes each and every individual to personal risk. However, by forming a business entity there is a “veil” placed between the individual and the business. This veil is a protective barrier that keeps the individual’s home and lifestyle separate from the business’ liabilities.
For example, many small businesses sign leases. If the lease is in the name of the business alone (and not personally guaranteed by any individual), then only the business entity is liable in the event that there is a breach of contract. Likewise, with a properly formed business, if the business is sued because a customer slips and falls, or because an employee unintentionally causes damage, then the business owner – an individual – is not at risk of being personally and individually responsible for the injury.
There are several types of business entities in Nevada, including limited liability companies and corporations. Each entity has its own specific benefits, and which one is right for your business depends upon your specific needs. If you are operating a small business as a sole proprietor or general partnership, you should seriously consider forming a business entity to take advantage of the tax flexibilities and protection built into them.