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Reducing Personal Liability using a Corporation or a Limited Liability Company

Operating a business as a sole proprietor or as a general partnership is generally not a good practice for most businesses. Using a corporation (Inc.) or a company (LLC) provides personal liability protection to the owners if they follow certain procedures that include:

1) Keeping your personal finances separate from the business finances;

2) Having the annual meeting and preparing the annual minutes;

3) Conducting all business in the name of the company; and

4) Avoiding the use of personal guarantees.

Most businesses are formed as limited liability companies (LLC) since the same protection is provided and it is generally easier to form a company and it costs less. However, businesses that decide to go public must be corporations (Inc.). Failure to act like a company may reduce the owner's protection in the event of a lawsuit or an audit by the Internal Revenue Service (IRS).

Another method that can be used to provide the same protection is a limited liability partnership (LLP) wherein limited partners are protected, but the general partner is not protected unless the general partner is a company or corporation.

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