To Incorporate or Not Incorporate
DISCLAIMER
This article is for informational purposes only and is not intended as a substitute for legal or financial advice. Consult a licensed attorney and a certified public accountant in your municipality before deciding on incorporating.
Congratulations – you’ve decided to start your own business! One of the first questions that new business owners ask is, “should I incorporate?”
The main reason why businesses incorporate is liability protection. What that means is if someone sues your business and wins, that person cannot go after your personal assets. Is it really worth the expense to incorporate to protect your personal assets? According to attorney Autumn Witt-Boyd in her podcast, “Legal Road Map”, there are a few things to consider.
- What is your risk tolerance? If you’re risk adverse, it may be best to to err on the side of caution and incorporate.
- What is your risk spectrum? If you’re a freelance designer solopreneur who runs your business out of your home, and you rarely (if ever) have clients visiting your home, you’re at the low-risk spectrum, and there may be less expensive options to set up a corporate entity, such as setting up a sole proprietorship and getting liability insurance. However, if you run a crossfit gym with equipment where a customer can get hurt, you’re at a higher-risk spectrum, and it may be best for you to incorporate to protect yourself.
- Do you have a lot of assets to protect? If you’re starting out, and you don’t have a lot of assets, like your own home or property, a lot of money in stocks and bonds, and expensive valuables like a fine jewelry or art collection, you may not need to take on the expense of fully incorporating since if you do get sued and lose, there isn’t anything for the person to get. However, be aware that if your assets grow and you have a judgment against you, the person who sued you can collect on the judgment if it’s within your state’s statute of limitations.
- Do you have other professional protection/malpractice insurances to protect you? Depending on what you do, this may be sufficient.
Again, before making the decision to incorporate, it’s good to consult with an attorney to understand the federal, state and local laws and to consult as CPA (Certified Public Accountant) to understand the tax rules for each corporate entity. In my opinion, if you live in a state where incorporating your business isn’t expensive, it’s best to err on the side of caution and spend the small amount of money to incorporate. Again, speak to an attorney to find out which corporate entity is best to form for your business.
Do you have your own business? What type of corporate entity did you form? Share your experiences in the comments below.
For the businesses that I’ve owned, I incorporated because I’m risk adverse, I had too many assets, and incorporating was inexpensive in the states in which the businesses were based.