Why should I incorporate my business? I get asked this all the time. There are two reasons you should make the leap – liability risks and taxes.
Much like a marriage, we all start our businesses with a certain glow and the total belief that we will be a complete success. While that may turn out to be true, the simple fact of life and business is there are plenty of bumps in the proverbial road on the way to success. These bumps can come in the form of everything from a period of really slow business like we saw with the Great Recession to lawsuits, tax audits and a host of other issues. Incorporating your business is one way to limit the damage associated with these risks.
I start a business in 2002. Everything is going really well. Then 2008 hits. My customers start closing their doors. The ones that are still in business are not paying their bills. I’ve suddenly got my own problems and it looks like my business will fail. If I’ve incorporated, the debts of the business stay with the corporation or limited liability company. Put another way, the people the business owes money to can’t come after my personal assets. If I have not incorporated, I can kiss my house and investments goodbye.
This alone is the number one reason to incorporate and, frankly, you are nuts if you don’t. Do you really want to risk your home, investments, savings and peace of mind on a business proposition? Trust me, you do not. I am not suggesting you give up on your business dream, only that you take steps to protect yourself should things not work out the way you hope.
And you know the best part? Forming a business is not that costly as what you would generally imagine. If you are the DIY types, you can actually register your business in less than $100 in most of the US states. There are plenty of free resource available online for business formation.
- BusinessEntity.org by Meredith Karter – Non-profit, very detailed write up on the business formation.
- Nolo.com – Has free guides but they push for buying their incorporation service.
The second reason you want to incorporate your business is to shield yourself from the risk of lawsuit liability. It costs a couple of hundred dollars to file a lawsuit. If you don’t incorporate, you face the prospect of being liable for any verdict in favor of the suing party. More so, you are going to have to pay for a lawyer. Much of this can be handled with a liability insurance policy, but most people don’t realize that such policies have a cap on what they will pay.
Let’s assume you get sued and a verdict of two million dollars is returned. You only have one million in insurance [a common amount]. The insurance company will pay the first million and you are on the hook for the second million.
I love election season. It is hilarious to listen to politicians talk about how small businesses are the backbone of the American economy. While true, the government absolutely hammers small businesses with taxes and regulations. This is particularly true if you are unincorporated where self-employment taxes have to be paid. By incorporating, you can implement tax strategies that limit the amount you pay Uncle Sam and give you more deductions than you get when unincorporated. If you don’t believe me, just ask your CPA.