Thinking about incorporating? Our Start-Up Legal Expert gives you a few reasons why you should.
Q: I'm thinking of starting a small business. Would there be significant advantages to incorporating my new business, and can I do that if it's a one-person business?
A: There are definitely some significant advantages to incorporating, and all states now permit one person to incorporate. (There is one exception to that rule: If you work in the computer field, the IRS may not allow you to operate a one-person corporation. In that instance, however, you can always form a two-person corporation. This second person can perform some administrative duties and receive a small salary.) In the last 10 years, more than 7 million businesses have incorporated, and although 7 million people can sometimes be wrong, in this case, they were probably right!
Perhaps the most compelling reason for incorporating is the limits it places on your personal liability. Unlike a sole proprietorship or a general partnership in which the sole proprietor or each of the partners has unlimited personal liability for all business errors, a shareholder in a corporation can lose no more than his or her original investment. He or she is not liable for the debts of the corporation.
What that means to you is that incorporating your business would protect your personal assets such as your house, your car and other things you own in your personal name. They can't be attached if your business fails or you lose a lawsuit brought against the business.
If you're starting a business in such high-liability industries as food service, child care and the like, the decision to incorporate is relatively obvious, but even in less obvious areas, limits on your personal liability can be important, particularly if customers will be visiting your place of business.
In addition to the limited liability incorporating offers, the corporation can offer its shareholder(s) medical, life and disability insurance benefits as well as retirement benefits (assuming that the business earns enough to provide the paid benefits).
There may also be significant income tax savings for those who incorporate. It's a good idea to talk to a CPA to determine what your tax obligations will be based on a projection of your net income from the business. You can then figure your tax bill as a sole proprietor vs. a corporate shareholder. Most state societies of CPAs have a Web site or phone number where you can request a referral list of CPAs qualified to work with small-business owners. Check your white pages for a phone listing under (name of state) Society of CPAs.
Other benefits of incorporation might include access to corporate discounts when purchasing goods and the stable image that incorporation may present to potential employees.
As with any decision, there are some drawbacks, such as more paperwork and certain formalities and restrictions that accompany the fact that the corporation is a separate, legal entity from you-even in the case of a one-person corporation. This "separateness" must be maintained, particularly by being careful not to co-mingle corporate and personal income and expenditures. You can easily accomplish this by maintaining separate bank accounts and bookkeeping records.
If you want more information about incorporating and the issues surrounding it, visit your local Small Business Development Center (SBDC) for free assistance. SBDCs are located in every state and are usually housed at an institution of higher learning. Visit http://www.asbdc-us.orgfor a list of SBDCs around the United States or call your local SBA office for the office nearest you in the phone book under U.S. Government listings
Carlotta Roberts holds a J.D. degree from Atlanta Law School and has been a consultant to small-business owners since 1981. Following careers in commercial real estate and later as a staff attorney specializing in employment law issues, she became area director of the Kennesaw State University Small Business Development Center, part of the national network of the SBA's Small Business Development Centers. In her current position, she has provided consulting services to more than 5,800 small-business owners since 1986. Her seminars and short courses on a variety of small-business issues reach more than 750 small-business owners or potential owners annually. Carlotta has appeared on CNN and Georgia Public Television to answer viewer questions concerning small-business legal issues, and has contributed articles to several state and local publications. Her H.I.R.E. Handbook, created to assist business owners in selecting employees, was a featured resource in the Bell South publication Small Business Connection.
The opinions expressed in this column are those of the author, not of Entrepreneur.com. All answers are intended to be general in nature, without regard to specific geographical areas or circumstances, and should only be relied upon after consulting an appropriate expert, such as an attorney or accountant.
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