Want to Start a Business? Better Read This First

You may think you can run a successful business without incorporating. Big mistake. Here's why.

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Steve StraussQ: Do I really need to incorporate? All of you experts say I do, but please -- I run a nice little business out of my home in my spare time. I don't make a lot of money and really see no need to spend it incorporating. Where I am I wrong?

-- J.A.

A:
Let me run a scenario by you:

Let's say that your "nice little business" is a cleaning service. You work for landlords, cleaning up recently vacated apartments, getting them ready for new tenants. One weekend, while working on a bathroom and cleaning up a place, you accidentally leave on a faucet while heading out to lunch. The ensuing water damage is about $2,500.

The problem is, the landlord does not want to file an insurance claim on such a small amount and therefore has decided to come after you for the damages.

If you are not incorporated, the landlord could sue you personally for the money, and you personally would be on the hook. And if you are unable to pay, the landlord could garner your wages, attach your bank account, put a lien on you house, or employ many other methods that would both make you life miserable and damage your personal credit.

By not incorporating, you put all of your personal assets and credit at risk and at the behest of your business. Is that risk really worth it?

On the other hand, if you had decided to form your small business as a corporation, the landlord would have no choice but to go after, or sue, the corporation, and not you. While your business assets and credit would be at risk, of course, your personal assets would be protected. The landlord could not legally go after your personal assets to pay the debt, only business assets.

You are protected.

So that is the primary reason any small business would want to incorporate: A corporation is a separate legal entity, standing apart from you. As such, it shields you from personal liability for business debts and obligations (for the most part).

That is not true when, like too many small-business owners, you form your business as a sole proprietorship or also, as a general partnership. Neither of those entities protect you with the "corporate shield" that a corporation affords you. Both of those put your personal assets at risk.

There are other advantages to incorporating as well:
  • There are tax benefits, depending upon the type of corporation you create
  • Your business will likely be taken more seriously by others
  • Corporations have unlimited life, whereas other business forms do not
  • Corporations offer the owner anonymity if so desired
  • Ownership is more easily transferred with a corporation

The few downsides include:
  • The cost to incorporate -- but even then, using software like the kind found at Nolo.com or LegalZoom.com means you can probably even do it yourself
  • Complexity and record keeping

Overall, for most businesses, the benefits usually far outweigh the burdens, and given that, the next logical question would be -- which type of corporation is best? That is a tougher call because each small business is different, and each type of corporation offers different things:

An S Corporation is often the preferred business form for many small businesses. There are some tax benefits and other things to consider.

A C Corporation is often used by businesses that expect to grow large and want to be able to freely transfer and sell lots of shares.

An LLC (Limited Liability Company) is also the choice of many small businesses. It is sort of a hybrid between a sole proprietorship/partnership and a corporation.

Deciding which one is best for you will require further research on your part, but one of them should work. Speak with an attorney and read up on each choice.

The bottom line is that there really are very few small businesses that would not be better of by incorporating.

Steven D. Strauss is one of the nation's leading small-business experts. A USA Today columnist, author and speaker, his latest book is The Small Business Bible. If you would like Steve to speak to your group, or if you would like to sign up for his free newsletter, Small Business Success Secrets! please visit his website at MrAllBiz.com. You can also follow him on Twitter at Twitter.com/SteveStrauss.

Want to be part of this column? Ask Steve a question at AOL@MrAllBiz.com.

Tags: Ask the Expert, business forms, C Corp, how to form a C Corp, how to form an LLC, how to form an S Corp, incorporating, LegalZoom, LLC, Nolo, S Corp, starting a business, Steve Strauss

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