To Incorporate or Not to Incorporate?
I sometimes get calls from people asking whether they should incorporate. When I am somehow able to stifle my automatic “YES YOU SHOULD!” knee-jerk reaction, I calmly provide some semblance of a well-reasoned argument in favor of incorporating.
Now, to clarify, by “incorporating” I don’t necessarily mean forming a corporation. I simply mean forming an entity so that you are no longer operating your business as a sole proprietor. The choice of entity includes a corporation, LLC, LLP, LLLP, and some other more obscure entity forms that I have yet to run across. The two most common entities I deal with are the corporation and the LLC.
For either a corporation or an LLC, you start with registering the entity at the state level and obtaining a state business license. Then, you’d apply for a local business license using the entity name as the applicant rather than your own name. For more information on this process, read my article on How to Start a Business in Las Vegas.
The purpose of incorporating is to place a barrier (a corporate veil) between your business, which is the likely target of a lawsuit, and your personal assets. That way, if someone sues your business and wins, they can’t use your personal assets like your house and personal bank accounts to satisfy the judgment. Instead, they can only get at the assets in the business, assuming you’re managing the business properly and haven’t signed any personal guarantees. When you operate a business as a sole proprietor, you and your business are one and the same. Therefore, anyone who sues your business and wins can dip into your personal assets to satisfy that judgment. In only extremely rare instances do I ever tell someone they’re better off as a sole proprietor. I’m talking unicorn sightings here, people. Isn’t it worth the few hundred dollars a year to provide yourself that protection and peace of mind? And if that few hundred dollars a year is cost prohibitive, brace yourself here, you probably aren’t making enough money for someone to come after you anyway. (I know, ouch.) You can’t get blood from a turnip, as they say. Which makes me wonder, what crackpot ever tried to squeeze blood out of a turnip? That’s just icky.
Contrary to popular belief, a corporation and an LLC provide the same level of limited liability protection for their owners. It’s right there in the statutes, NRS 78 and 86, respectively, which explicitly state that the individual officers of a corporation or members of an LLC are not personally liable for the debts or obligations of the business, providing they’re being managed properly. (I’m a lawyer, I can’t say anything without throwing in a condition.)
Whether you decide to form an LLC or a corporation depends largely on the type of business you plan to run, how you plan to fund it, how you want to grow it, how you intend to manage it, and what your ultimate exit strategy is. Incidentally, these are questions that require some degree of analysis and some modicum of intelligence and cannot be answered by the robots over at Legalzoom. Just sayin’.
To conclude, in 99.9% of instances, it’s best to incorporate. The question then becomes what type of entity to form and then how to manage it so that you keep that corporate veil securely in place.