Protecting Your Business: Separate Your Personal and Business Risks
In the world of business ownership, structure matters more than you might think.
With 65% of small businesses facing legal threats each year, how you organize your business can make or break your future.
Let's explore why separating yourself from your business is essential for protection.
RI
by RED WORLDWIDE INC.
Defining Key Terms: Legal Person vs Natural Person
Legal Person
A legally recognized entity created under the law that exists independently of its owners and can exercise rights and assume liabilities.
Corporations, LLCs, Irrevocable Trusts, and partnerships with separate legal identity
Can own assets, enter contracts, and incur debt in its own name
Provides liability protection that shields personal assets from business claims
Natural Person
A human individual recognized by law as having rights, privileges, and obligations distinct from other entities.
Sole proprietors and individual business owners without formal entity structure
Personal and business finances and liabilities are legally intertwined
No distinction between business debts and personal financial obligations
Legal Persons = Juridical Artificial Persons
Non-human entities granted legal personality through incorporation or legislation, existing independently from their human owners or members.
Business Entities
Corporations, partnerships, trusts, and LLCs are treated as legal persons, distinct from their shareholders or members.
Can own assets, incur liabilities, and participate in legal proceedings independently.
Rights and Duties
Legal persons have constitutional rights such as due process and equal protection under the law.
Can be held liable for breaches of contract or torts like natural persons.
Evolving Recognition
In some jurisdictions, legal personhood has extended to non-human entities like animals, rivers, schools, railroads, and religious institutions.
This grants them certain legal rights and protections previously reserved for humans and organizations.
Comparison: Legal Person vs. Natural Person
Aspect
Legal Person (Juridical/Artificial)
Entity recognized by law (corporation, trust, NGO, etc.)
Created by law, registration, or legislation
Rights & Duties: Similar to natural persons (can sue, own property)
Examples: Corporations, trusts, government bodies, animals*
Terminated by dissolution, liquidation, or legal revocation
Aspect
Natural Person (Human)
Individual human being
Created by birth
Rights & Duties: Full spectrum of human rights & duties
Examples: Any living human
Terminated by death
Types of Legal Person Structures
Corporation (C-Corp)
Separate tax entity with shareholders, officers, and directors. Offers strongest liability protection.
Limited Liability Company (LLC)
Hybrid structure with liability protection and tax flexibility. Most popular for small businesses.
S-Corporation
Pass-through entity that avoids double taxation while maintaining liability protection.
Limited Partnership
Structure with general and limited partners. Limited partners enjoy liability protection.
Business Trust
Legal entity where trustees manage assets for beneficiaries. Offers liability protection and potential tax benefits.
Rivers
In some jurisdictions, rivers have been granted legal personhood to protect their ecosystems, rights, and natural flow.
Animals
Certain animals have received legal person status in some legal systems, granting them specific rights and protections.
Banks
Financial institutions with legal personhood that can own assets, enter contracts, and be held legally accountable.
Schools/Universities
Educational institutions recognized as legal entities with the ability to own property and enter into legal agreements.
Partnerships
Business arrangement where two or more parties agree to share profits and losses, with varying degrees of liability protection.
How a Legal Person Shields You
Legal Separation
Creates a distinct entity from you
Asset Protection
Shields personal assets from business debts
Liability Limitation
Only business assets at risk in lawsuits
In 2023, only $250B in business assets were seized from corporations. Personal assets remained protected by the corporate veil.
Risks of Operating as a Natural Person
Unlimited Personal Liability
Your personal assets are fair game
Home at Risk
Your residence can be seized
Savings Vulnerable
Retirement and investments exposed
One in three sole proprietors faces a lawsuit in their first five years. Without protection, everything you own could be lost.
Asset Protection Strategies with Legal Entities
Choose Entity
Select LLC, S-Corp, trust, or C-Corp
Maintain Compliance
Follow all legal formalities
Secure Insurance
Add liability coverage
Separate Finances
Use dedicated business accounts
The American Bar Association reports an 80% reduction in personal exposure to lawsuits with proper legal structures.
Tax Advantages of the Legal Person
Legal entities unlock significant tax advantages unavailable to sole proprietors. From dedicated business deductions to potentially lower tax rates to favorable distribution options .
Funding, Growth, and Investor Appeal
Venture Capital Access
70% of VCs fund only incorporated businesses. Legal entities provide the structure investors require.
Capital Raising Options
Legal entities can issue shares or membership interests. This creates multiple avenues for growth funding.
Business Transfer Flexibility
Selling or transferring ownership becomes significantly easier. The business can exist beyond its founder.
Real-World Pitfalls: Sole Proprietor Case Study
Jane's Boutique Opens
Jane Smith launches as a sole proprietor without legal advice
Contract Dispute Arises
A supplier claims breach of contract and sues for damages
Court Judgment
Jane loses the case and faces a $500,000 judgment
Personal Assets Seized
Jane's home, savings, and investments taken to satisfy the debt
In 2022, Jane's story became a cautionary tale about the dangers of operating without liability separation.
Success Story: Asset Protection via LLC
TechStart LLC Launch
Software developer forms LLC before launching new product. Personal wealth: $1.2M.
IP Lawsuit Challenge
Competitor files lawsuit claiming patent infringement. Seeks $800K in damages.
Protected Outcome
Court case affects only LLC assets. Owner's home and investments remain untouched.
Next Steps: Protect Your Business and Assets
Assess Your Situation
Evaluate your business risks, assets, and growth plans
Consult Professionals
Meet with a business advisor, accountant, attorney
Form Your Entity
File necessary paperwork for your chosen structure
Maintain Compliance
Follow all requirements to preserve your protection