Summary: In this particular episode, you will learn About business types Liability protection Podcast transcript: Topics Business Types, United States Liability Protection and Piercing the Corporate Veil Sole Proprietorship Business Types, United States The legal structure of a business is referred to as the business entity, while Generally Accepted Accounting Principles (GAAP) provides guidance on different accounting methodologies. Under GAAP, a business will be on the accrual method, reconcile cash, and maintain a general ledger regardless of the entity type. Entity choice is driven more by legal, tax, and investment concerns. Most legal benefits and operating rules are governed by the state, while taxation rules will be governed at the federal level. States and cities may also charge fees and tax. While tax is an important feature of entity choice, it may outweighed by other business needs, such as capital investment. Liability Protection and Piercing the Corporate Veil Different business structures offer different liability protection to owners, depending on the laws of the state. In the case of sole proprietorships and general partnerships, no liability protection is granted under the law. Limited liability partnerships, limited liability companies, and corporations provide liability protection to owners, but not in all circumstances. Regardless of the business entity choice, insurance can be used to protect owners against professional liability. Entity structure does little to protect individual owners who are negligent or break the law. For example, a self-employed surgeon cannot rely on a corporation to protect personal assets if he or she should kill a patient while performing surgery drunk. In such a scenario, the corporate structure would do little or nothing to protect the doctor’s personal assets. Holding corporate owners personally liable for wrongful acts is referred to as piercing the corporate veil. The courts may hold perpetrators of crime personally liable regardless of the business structure. There are other actions that owners can do that may effectively erode any protections under the law. If an owner does not follow the required entity protocols by co-mingling funds (combining business and personal accounts), neglects to pay state fees, or has fraudulent accounting, the courts may ignore the structure for legal purposes. Individual investor owners, chief executive officers, and chief financial officers may be held responsible for corporate negligence. Sole Proprietorship The sole proprietorship is the most common entity structure in the United States. Only one person may own the business and he or she is personally liable in the case of lawsuits. To become a sole proprietor, an individual need only start operating as a business. By default, the sole proprietorship operates under the individual owner’s name. However, a business may establish a “DBA” which stands for Doing Business As in order to operate under a different name. The business may have employees compensated through payroll. The business owner does not receive a wage, but may withdraw or contribute funds at any time. Income taxes are computed at the individual level based on the profit or loss of the business. Typical sole proprietorships do not require outside investors and are small in nature. Examples include consulting services, lawn care, and small dental practices. Advantages Sole proprietorships are low cost and require little to no setup. Some cities require registration and property tax if the sole proprietor has significant business assets. Because it is not a separate entity for tax and legal purposes, business activity is reported on an individual tax return. Business and personal accounts are not required to be separated, but encouraged. Many owners choose to perform non-GAAP accounting at year end to prepare a cash basis profit and loss statement. Disadvantages
