Should I Incorporate My Business?
I’m Gina Bongiovi. And I’m a lawyer who works with start ups and small businesses. And in this video I’m going to talk about whether or not you should incorporate your business.
So if you’re in business and the most formal thing you’ve done thus far is print business cards, then you’re operating as a sole proprietor. And what it means when you’re operating a sole proprietor is God forbid somebody sues you for something you did in your business, they can get at your personal assets if they win a lawsuit.
The purpose of forming an entity like an LLC or a corporation is that you’re then doing business as the LLC or the corporation and you’re not doing business as yourself. So the LLC and the corporation are kind of in their separate bucket. And all the assets for the LLC and the corporation are in that bucket. And then if somebody is suing all they can do is get at the assets in that bucket instead of the assets that are in your personal assets bucket. Love those analogy’s. sometimes they breakdown but that’s okay.
So if you’re forming an LLC or a corporation you register it at the state level, you get your business license. There are lots of different entity types. There’s the LLC, the corporation, the LLP, the LLLP, the LP, all these crazy things. Most of what I deal with is the LLC or the corporation.
And whether you form one or the other kind of depends on what you’re doing with your business. Most of the clients I deal with I default to the LLC because you have the benefits of an LLC, you have the benefits of the limited liability protection for the owners, which means that if somebody is suing they can’t get at the personal assets of the owners. But you also have more flexibility with how the entity is taxed. And I’ve encountered kind of a myth lately that people think that a corporation has more liability protection than an LLC and that’s not true. It says, at least in the Nevada statue, I am a Nevada licensed lawyer so I’ll talk about Nevada statues, it says in chapter 78 for corporations and 86 for LLCs that the individual owners or officers of a corporation or an LLC are not personally liable for the debts or obligations of the business. It says right there in the statue. Of course there are exceptions. If you have a pierce the corporate veil argument. And that’s another concept that’s probably worth going over is the corporate veil.
The corporate veil is what protects your personal assets from somebody coming after your business. So forming an entity sort of creates that corporate veil.
I was using the bucket analogy. Maybe that’s not the best analogy, but there’s a corporate veil between the business and your personal assets. So there are a couple arguments that people use in order to pierce the corporate veil in order get through the business to your personal assets.
And that’s if your business is under capitalized. If you’re just using the business or the entity like an LLC or a corporation as a shell. So sometimes you’ll run into companies that say okay we need to form you a personal LLC that owns and manages the other LLC and suddenly your organizational chart looks like a maze.
That’s not necessarily a good thing because sometimes if they’re just shell entities then they can be pierced really easily and then you’ve paid all these filing fees and filed corporate tax returns for no reason. So bottom line is that an LLC or a corporation provide the same amount of liability protection as long as your managing them properly. You’re not co-mingling your assets. You’re not co-mingling your funds. You’re not paying your home mortgage payment out of your business account or you’re not going grocery shopping out of your business account. What you have to do there, with the co-mingling of your assets is you have your business bank accounts and you pay yourself into your personal checking account out of the business account. And then you pay your personal expenses out of the personal account. Even though you have the temptation of cutting out that middle man, you definitely want to pay yourself out of your business account into your personal account and then pay your personal expenses out of there.
Never cut out the middle man and pay your personal expenses out of your business account. That’s a big reason why those corporate veils get pierced.
So in short, an LLC and corporation provide the same amount of liability protection provided you are operating them properly. And whether you choose an LLC or a corporation depends on what you want to do with your business.
As I started to say before, I default to an LLC when I’m forming businesses for people. Unless a couple of things are true for that business. Number one they want to offer different classes of stock which you can only do with a corporation. You cannot do with an LLC. Or they’re dealing with international investors because international investors don’t really know how to deal with an LLC. It’s a fairly new, maybe forty year old entity type. So internationally they really are more comfortable with corporations. So high-tech start-ups are typically corporations, things like that.
So definitely if you’re operating as a sole proprietor it’s definitely worth exploring. Forming some sort of entity. Paying a few hundred dollars in filing fees every year to get that protection.
Thank you for watching. If you are interested in more of these videos all of the links that I described are in the description below right below the like button. Thank you very much.