Starting a new business is an exciting time that naturally raises many questions. One important question is what type of entity should be used to operate your new venture? In California, your choices are limited to the following types of entities and derivations thereof: 1) Sole Proprietorship; 2) Corporation; 3) Limited Liability Company (LLC); and 4) Partnership.
Typically, limiting personal liability is an essential component of corporate formation. What limited liability refers to is that, with Corporations and LLCs, the obligation of the owner (or owners) is limited to the money or other property contributed to the business (as well as any money or other property that an owner has committed to contribute to the business in the future).
For an entity that is not a limited liability entity, the owner (or owners) is fully liable for the obligations of the business, even if the owner has not committed to contribute to it in the future. Sole proprietors and partners in a partnership (generally) do not enjoy limited liability for the obligations of the business. The owners of corporations and LLC’s enjoy limited liability for the obligations of corporation or LLC.
In California, the law treats the property owner as the guarantor of the safety of his tenants. If anyone is injured on a property-for any reason and regardless of fault-the owner will generally be held responsible. That is a big legal burden and it’s easy to see how lawsuits – frivolous or not – are easily generated in this type of system. The good news is that this liability, the threat of a lawsuit from a tenant, visitor, buyer, seller or lender, is often contained by holding rental property in an LLC – an ideal result from an asset protection standpoint and it creates the ability to own rental real estate without the personal liability risk.