Should I incorporate my new business?

January 16, 2013

Should I incorporate my new business? (Part One)

This is a question I am often asked my clients in my business law practice.  My immediate response is just as often: "It depends".

In the aftermath of the Great Recession of 2008 many individuals have been laid off their jobs, or upon graduating from college cannot find a job.  Many of then have decided to start their own small businesses in order to use their skills and earn a living.  Typically, an individual will operate a new start-up business as a sole proprietorship.  There are few legal requirements for doing business as a sole proprietorship beyond applying for a business license, filing a fictitious business name statement, and opening bank accounts for the business.  In some instances, where the type of business is regulated by state law, a professional license is also required.

If the business and the resulting revenue continue to grow, there is a point in time at which the owner may consider incorporating.  Here are three important reasons to form a corporation to operate a business.  First, limited liability for the debts and liabilities arising from business operations.  Second, income tax savings and benefits.  Third, ease of transferability of ownership interests in the business.

First let's look at Limited Liability.  Since a corporation, validly formed and operated, is an artificial person under the law, it is considered a separate entity and the assets and debts of the corporation are its own and not that of the shareholders, directors, or officers.   For this reason many banks and lending institutions will require the individual shareholders to personally guaranty and loans or lines of credit available to the corporation.  In other words, with a few exceptions, the corporation's creditors cannot sue the shareholders, directors, or officers personally absent a personal guaranty of the debt signed by them individually.

Keep posted for our next post later this week where we will focus on income tax savings and transferability.  As always the foregoing is but a brief overview of a complex subject and the reader is cautioned to seek the advice of an experienced business attorney and their accountant before proceeding with the incorporation process.