November 22, 2014

Incorporating Isn’t Just for Big Corporations

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.

Incorporating Isn’t Just For the Big Corporations

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.

More in: 8 Comments ▼

Nellie Akalp


Nellie Akalp Nellie Akalp is CEO of CorpNet, her second incorporation filing service based on her strong passion to assist small business owners and entrepreneurs in starting their business. Free guides, advice and videos on small business legal topics are available at her Small Biz Corner.

8 Reactions

  1. Couldn’t agree more. Incorporating my business was probably one of the best steps I ever took. The tax breaks easily offset the cost of incoporation. I say incorporate and get a good CA who understands your business.

  2. I did a consult with a sole proprietor that lost business because his business wasn’t a business entity (LLC, Corp). If you’re a freelancer that contracts with companies, some of those companies like to do business with LLCs/Corps because it helps them avoid the independent contractor/employee issue. So forming an LLC or corp can be good for a marketing perspective as well!

  3. I formally registered my business as an LLC this year for the reasons mentioned. The process was actually quite easy (still took some time of course) and the legal protection provides some peace of mind that is well worth the effort.

  4. @Nick Glad you enjoyed the post and most importantly that you took the necessary steps to incorporating your business! Please reach out to us if you have any questions. CorpNet.com is a CA based company and is founded by CA lawyers so if you never need any assistance in maintaining your Corporation, feel free to reach to us; we can definitely assist you :)
    @Robert Thanks for reading my post and really glad you took the steps to Form your LLC. Please fel free to reach out to us at CorpNet.com should you ever need to make any changes to your LLC or would like to to file your compliance docs to keep your LLC in compliance!

    -Nellie

  5. Nellie,

    I’m a business attorney and I almost always recommend that a new business be operated as an entity such as a corporation or LLC that offers limited liability to the owner.

    In fairness, however, it should be clear that “limited” liability is not the equivalent of NO personal liability. There are many types of liabilities that may pass through to owners no matter how carefully they treat their entity as separate and apart from themselves. And, of course,, there are potential liabilities that arise because the owners take actions that enable creditors to pierce the corporate veil.

  6. The general public needs to be made aware that coorperate tax cuts help US and not huge coorperations.

Leave a Reply

Your email address will not be published. Required fields are marked *

*

You may use these HTML tags and attributes: <a href="" title=""> <abbr title=""> <acronym title=""> <b> <blockquote cite=""> <cite> <code> <del datetime=""> <em> <i> <q cite=""> <strike> <strong>



Compare your business to the industry - Try our new tool


X