Should You Incorporate Your Business?

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Jeffrey Johnson is a legal writer with a focus on personal injury. He has worked on personal injury and sovereign immunity litigation in addition to experience in family, estate, and criminal law. He earned a J.D. from the University of Baltimore and has worked in legal offices and non-profits in Maryland, Texas, and North Carolina. He has also earned an MFA in screenwriting from Chapman Univer...

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UPDATED: Sep 3, 2020

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If you are starting a new small business, you’re likely considering a series of legal questions, such whether to incorporate the business or operate it as a sole proprietorship or a partnership.

If you concluded it makes sense to incorporate, a new round of considerations come into play – whether to form a limited liability company, called an LLC, or a regular business corporation, and if so, what type of corporation?

This short video will provide some basic guidance, so you can get back to the really important stuff such as exactly what will the new business sell, how it will attract customers, where will it be based, who will it employ, and how will it make money.

One major benefit of operating a new business through a corporation or LLC is that these entities can shield the business’ owners from unlimited personal liability for the business’ actions.

For example, if the new business is operated as a sole proprietorship or as a general partnership, and sells a product that turns out to be defective and seriously injures a customer, or the business’ delivery truck injures someone, the business’ owners – the proprietor and all its partners – usually would be personally financially liable for the full amount of damage, to the extent they were not covered by insurance. The owners would also be fully liable for other debts and obligation incurred by the business, such to banks, suppliers, employees, contractors and the landlord.

If the business is conducted through a corporation or LLC, and the legal formalities are complied with, the owners would NOT be personally liability for the business’s actions or debts. (Of course, if the landlord insisted on the founder personally guaranteeing a lease, or a bank insisted on the founder’s guarantee of a loan to the business, the founder would be personally liable for those obligations he agreed to take on, but that’s far better than all the owners potentially being liable for everything.) That’s a big benefit to using an LLC or a corporation.

Another benefit of incorporating is that a corporation or LLC provides continuity for the business. If a shareholder withdraws or dies, the entity or business continues, and only the owners or their percentage of ownership will have changed. If a proprietor passes, technically the business ends, and his or her estate steps in.

Of course there are some extra costs and legal hoops to go through when creating and operating a business through an LLC or corporation. Although the process of setting up a corporation or LLC is not complicated, getting some advice upfront from a lawyer and accountant before doing so is always a good idea and can save you lots of money, taxes and heartache in the long run.

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