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Planning for your new business in regards to tax liability

If you are planning to form a new business, it is important to consider certain legal realities in advance. Once you file paperwork committing yourself to a certain business structure and formation, you will be locked into those decisions in significant ways. By exploring different kinds of business structures and formations in advance, you can better ensure that you are making an informed decision about your future endeavors.

For example, it is important to consider the kinds of tax liability you and your business will face if you choose one particular business structure over another. Some business formations will leave you personally liable for your business’s unpaid tax debts while others will not.

If you choose to form your business as a sole proprietorship, your business’s creditors may come after your personal assets in order to repay your business-related debts. Under the eyes of the law, you and your business are financially the same entity if you opt to form a sole proprietorship. If you form a partnership, you and your partner(s) could be held liable for tax debt as well, although there are nuances to this arrangement that do not figure into a sole proprietorship’s liabilities.

By contrast, owners of corporations are not personally liable for business-related tax debt because the law considers a corporation to be a distinct entity. As a result, this formation can be appealing for individuals who wish to insulate their personal assets from business-related debts. If you have questions about these formations and others, please do not hesitate to speak with an attorney experienced in matters of business formation and planning.

Source: Findlaw Free Enterprise, “Are Business Owners Personally Liable for a Company's Unpaid Taxes?” Le Trinh, March 11, 2015

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