The other day I had the wonderful opportunity to chat with Anita Campbell on the Small Business Trends Radio Show, where we discussed legal tips that entrepreneurs need to know when starting their business. I want to reiterate one part of that conversation, because time and time again I encounter passionate entrepreneurs who are turning out innovative products, groundbreaking services, fantastic business models, impressive balance sheets, but overlook one thing…a legal business entity.
Too often, small business owners consider their ventures too small to worry about forming a business structure…and think that having an “Inc.” or “LLC” after the company name is only for large businesses with mazes of cubicles and a big payroll. I’ve heard all kinds of statements, including, “I don’t need anything complicated. I’m just a one-person operation. My customers like working with a small business, so why would I want to change?”
The assumption here is that adding an “Inc.” or “LLC” after your company name means you need to trade in your small business feel for a power suit and cubicle. However, this couldn’t be farther from the truth. There’s no reason that business culture and identity need to be linked with your business’ legal formation. To put it another way, you can take your legal considerations seriously, while still having fun and staying small.
Even the freelance writer or home-based soap maker should consider forming an LLC or corporation, and here’s why.
First and foremost, the LLC (Limited Liability Company) and Corporation (C Corp or S Corp) protect your personal assets from any liability of the company. That is, if your company happens to be sued, your personal assets (i.e. property, savings accounts) are shielded from any judgment.
I know that for most entrepreneurs, liability is farthest from your mind, unless of course, you’re a doctor or day care operator. But what about those less “risky” businesses? For example, a blogger. It’s hard to imagine that sitting behind your computer can put you at any real risk of a lawsuit. But what if you unintentionally plagiarize someone’s work? Or find yourself accused of slander? What if your major advertiser fails to pay, so you can’t pay any of your own business partners and contracts?
I don’t like unnecessary scare tactics, but I do like education. Certainly, these are worst-case scenarios and there’s a slim chance you’ll ever run into legal problems. However, if you’re sued as a sole proprietor, you’ll be sued personally. And that means everything – from your car to your children’s college fund to your retirement savings – is at risk.
Of course, you might be just starting out and don’t have any significant personal assets to worry about. You still need to pay attention as a creditor judgment can actually last up to 22 years (11 years + 11 years). So if you’re sued today, your personal assets are vulnerable up to 22 years…after you’re a huge success. Therefore, you need to worry about protecting not only the assets you have today, but any assets you’ll have tomorrow. And I don’t have to tell you that a lot can happen in 22 years.
Once your business is incorporated (either by forming an LLC, C Corporation or S Corporation), it exists as a separate business entity. This means that the corporation (and not you, the owner) is responsible for all of its debts and liabilities. This is known as the corporate shield and it will help protect you from the unexpected risks.
And liability protection is not the only reason to consider your business structure. Here are the main benefits of incorporating/forming an LLC:
- Liability protection: Just wanted to emphasize the importance of liability protection one more time… the LLC/corporation will protect your own personal assets from the liability of the company.
- Taxes: Federal income tax rates can be lower for corporations than for individuals. And as a corporation, you may be entitled to additional deductions.
- Credibility: Adding LLC or Inc. after your company name boosts your credibility in the eyes of some customers and partners.
- Business credit/capital: As a corporation or LLC, it can be easier for you to access a line of business credit. And forming a C Corporation will be essential if you plan to seek venture capital funding.
- Added layer of privacy: With an LLC or corporation, the company’s “registered agent” goes on public record, and not your home or business address (in most cases).
These benefits are all very important and they have very little to do with company size or company culture. LLCs and corporations (specifically S-Corps) can still be family-owned, family-run, local shops, and any other kind of small business. After incorporating or forming an LLC, you can still continue to offer the same great service or other personal touches that make your small business unique. In fact, keeping the small business mentality is exactly what can help you compete with those larger companies that have deep pockets and vast resources.