limited liability – Christine Mathias, Business and Estate Planning Attorney

Selecting a business type is a lot like buying a car. There are pros and cons to consider with every vehicle and some will be more suited to your individual needs than others. The same is true when setting up a business. That said, tax treatment is one of the major issues that could lead you to choose one type over another.

With that in mind, the term “pass-through” entity comes up a lot in the literature on business formation. Simply put, a pass-through entity is a company that does not pay corporate tax. Instead, the income “passes through” to the owner, meaning the tax obligation is paid only once on his or her personal return. As you can imagine, this feature can be a major advantage.

Whether you are new to owning a company or are a seasoned entrepreneur, entering into contracts is a fundamental part of being in business. These agreements will vary in size and scope and can result in some obligation or debt being incurred by the company.

Now, in most cases, if you choose the appropriate structure for your organization (such as a corporation or LLC) you, as the owner, are shielded from liability in the event that the company cannot carry out its responsibilities. In other words, you would not ordinarily be on the hook for the resulting debts and legal obligations.

However, it’s important to note that there are times when this protection can be stripped away. This is referred to as “piercing the corporate veil” and means that owners will be held personally financially liable for the debts of the business.