Protecting Personal Assets When Establishing a New Business

Starting a business can be one of the most rewarding and satisfying undertakings a person can pursue. For some, it involves chasing and achieving a personal dream, and for others, it provides an opportunity for freedom and flexibility from a corporate job. Launching a new business venture comes with a lot of hard work and many challenges. Countless tasks impose themselves upon entrepreneurs trying to get their businesses off of the ground.

With so much to accomplish, business owners may not be aware that incorporating can be an important step to ensuring the success of a business. Whether it’s a sole proprietorship or a large-scale operation, the advantages to forming a corporate entity are numerous. Advantageous tax benefits, credibility with customers and the protection of personal assets are just a few of the many reasons business owners choose to incorporate or form a Limited Liability Company (LLC). In fact, an ongoing business that has yet to incorporate would benefit the most. With an established and growing clientele, there may come a greater chance of getting sued, and a corporate entity would help shield its owner’s personal assets. It’s the responsibility of the owner to realize just how important it is to have a lasting and proven business structure.

Here are the most critical items to consider when selecting your business structure:

• Protection of personal assets – Sole proprietors and partners have unlimited personal liability for business debt or lawsuits against their company. Creditors can attach homes, cars, savings or other personal assets. Incorporating or forming an LLC helps separate your personal identity from your business identity. Corporate shareholders or LLC members have only the money they put into the company at risk.
• Pass-through taxation – For sole proprietors and partners, company profits/losses pass directly through to their personal tax returns. For corporations, profits are taxed, distributed to shareholders as dividends and taxed again on the personal level. This “double taxation” can be avoided while still enjoying the benefits of personal asset protection by forming an LLC or by electing an S Corporation. S Corporations and LLCs can be taxed just like partnerships.
• Uninterrupted business – Sole proprietorships and partnerships may automatically end or become legally entangled when an owner dies or retires. Corporations and LLCs are enduring legal business structures. They continue regardless of individual officers, managers or shareholders. Corporation ownership may be transferred, without substantially disrupting operations, through sale of stock.
• Access to capital – Sole proprietorships and partnerships may find investors hard to attract because of personal liability. Investors are more likely to purchase shares in a corporation where they can separate personal and business assets.
• Credibility – Adding “Inc.” or “LLC” to your company name helps a business seem larger and more established.

A common misconception regarding the incorporation process is that only a lawyer can guide entrepreneurs through the process of forming an LLC. Lawyers can be a trusted and knowledgeable source for incorporation, but legal fees can quickly mount. Entrepreneurs have chosen to go the route of using a service company. Service companies provide the opportunity to incorporate or form an LLC over the phone or on the Internet. In most cases, the process can be completed in less than ten minutes. Service companies can answer questions such as, “Which entity type is right for me?” and “What states are the most advantageous for forming an LLC?” Service companies provide information to business owners allowing them the opportunity to make the decision on what type of business structure and in what state they should form a business.

Most business owners choose to incorporate or form an LLC in the state in which they plan to conduct business. Typically, filing in your home state is the least complicated, and less expensive as it helps avoid paying franchise taxes and filing annual reports in multiple states. For many entrepreneurs, they find it necessary to expand their businesses into many additional states. Doing business in multiple states requires that companies “qualify or register to do business” in each state. A corporate agent can be very helpful in making small business owners aware of any additional filings that may be required by law.

No matter which business structure you choose, it is important to carefully examine the advantages and benefits of incorporating or forming an LLC.

Construction Business Owner, March 2009