Many people form corporations and other entities specifically to limit their liability—but please understand that you don’t really get personal liability protection at all. That’s a major misunderstanding. Although you might be protected from the debts of the entity, you are not protected from lawsuits. Think about this. You are working in your business entity (especially if you are the one doing the primary work). You do something wrong. The customer or client sues. Who will they sue? Naturally, they will sue your business. But if you are the one who caused the problem, damage, loss, or harm, they will also name you in the lawsuit. Your corporation or limited liability entity gives you no protection at all. On the other hand, suppose one of your employees is responsible for the harm or damage. Are you protected? Nope. You’ve heard the old saying “The buck stops here.” Ultimately, you are responsible for everything your employees do. Of course, you could always defend yourself in court and win. But at what cost? The monetary cost and time and stress invested in litigation is enormous. Even when you win, it could deplete your savings—and destroy your health.
So if it’s primarily liability protection you want, skip the entity altogether. Instead, get a solid liability insurance policy—and read it! Consider adding an umbrella policy to protect more of your assets if the liability policy can’t go high enough to protect your life’s savings (home, retirement accounts, investments, children’s college funds, and so on).
Limited liability partnerships (LLPs) are usually reserved for professional groups, such as attorneys, accountants, architects, and others with special licenses—or really good political lobbyists.
Limited liability companies (LLCs) are an interesting creation. LLCs are one of the most popular business forms with attorneys, since the attorneys can set them up easily using boilerplate forms. LLCs solve the problem of general partner liability. All partners, including managing partners, have liability protection from the debts of the business.
Corporations (corps) are still the most common large business format used. Most publicly traded companies are corporations. Some, on the smaller stock exchanges, may be LLCs.
S corporations (S corps) have all the protections of corporations, but most of the tax filing advantages of partnerships.
If you want to get attention and raise money quickly, a nonprofit organization is a great structure. The right cause will open lots of corporate doors and treasuries. Radio and television stations are required to run public service spots, so advertising can be free. The big drawback to being a nonprofit is that you can get voted out if you don’t structure your organization properly. You don’t actually “own” the “company.” So don’t set up your business as a nonprofit entity unless you’re prepared to do it right. Otherwise, the IRS will come down on you like a ton of bricks.
You can start out with a nonprofit entity to establish yourself, your image, and your credibility. Use that as a jumping-off point to create a parallel business, funneling part of your profits to your nonprofit. Just be careful not to use your nonprofit to give your own business advantages and benefits. Self-dealing can void your exempt status.
Set up things properly, and you will be helping yourself and doing good at the same time. Simply take a decent compensation as director of your nonprofit and make a remarkable improvement in the world around you.