How do you know what type of business entity to file?

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How do you know what type of business entity to file?

My sister and I recently started an event planning service. Should we file for an
LLC or a general partnership?

Asked on June 4, 2019 under Business Law, California

Answers:

SJZ, Member, New York Bar / FreeAdvice Contributing Attorney

Answered 2 years ago | Contributor

LLC.
Here's why: with a general partnership, you both would be personally liable if the business were sued (e.g. if somone were injured at one of your events and tried to blame you; or for alleged employment discrimination) and for the business's obligations (like leases, contracts, etc.). However, an LLC protects you from the vast majority of business-related debts and obligations (only the LLC itself has to pay or can be sued) other than--
1) Anything you personally guaranty, such as if you take out a loan but because the business is new or small, the bank wants you to personally guaranty it.
2) Anything where you could be sued because you *personally* injured another person or did something wrongful: for example, say that while driving to an event to manage it, your sister accidently runs someone over. She could be sued, as the driver; but you would not be liable simply because you are part of the business. 
3) Payroll or sales tax liability, since the government makes the LLC "member" (owner) who handles that personally liable for any mishandling or mistakes with those taxes.
But even with those exceptions, you have much more protection as members of an LLC than as general partners.


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