Should you incorporate your business?

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One of the reasons often cited for incorporating a business is the protection from liability that it can offer the individual who owns the business. But that protection isn't all encompassing. Consider these points before deciding to incorporate your business.

One of the reasons often cited for incorporating a small business is the liability "shield" incorporation offers the owners. Legally, a corporation is considered a "person" with its own identity separate from the "identity" of the individual owners of the corporation. So, theoretically, if a corporation is sued and loses, only the corporation, not the individuals who own the corporation would be responsible for paying court-ordered damages.

Unfortunately, however, that theoretical liability shield won't deflect very many legal bullets if you are the sole owner of a very small corporation. The reason: if you do something that exposes you to legal liability, both the negligent person (you) and the corporation may be held liable. You cannot excuse your own misconduct merely by incorporating.

When you have employees, things change. If an employee was making a delivery for you and injured someone in a car accident, he could be held personally liable to the victim, and the corporation could, too, through a legal doctrine called vicarious liability. However, because the corporation is a separate entity from its shareholders (owners), theoretically, the shareholders' personal assets would be protected.



But here's another real-life "gotcha." If you have employees, you could inadvertently leave yourself liable for damages, through something known as the alter ego doctrine, which is part of a legal remedy known as "piercing the corporate veil." (Only a lawyer could dream up terms like these.) To avoid that risk, you must treat the corporation as a separate entity in all of its formal, legal respects.

Similarly, incorporating a one-person or very small business seldom protects the owner(s) from liability should the corporation default on a loan or lease. Banks, landlords and others often require personal guarantees on loans and leases, and if you make such a guarantee, then the corporate form of business will not have no effect on your personal liability.

There are other issues besides liability you should consider before making a final decision. Among them, the corporate structure may require you to observe certain legal formalities regarding the way your run your business, and may expose you to certain taxes or annual fees which do not have to be paid if the business is a sole proprietorship or partnership.

Nevertheless, some small and home businesses do benefit from incorporating.  Among the benefits some micro-sized businesses gain is an enhanced image. Being able to include the abbreviation "Inc." at the end of your business name makes your business appear to be bigger and more established than an unincorporated business. Depending on circumstances, incorporation may have tax benefits as well. And, finally, there are some micro-sized businesses that can gain some liability protection by incorporating. The bottom line:    consult with both your attorney and your accountant and get all the facts you need to make the right decision for your business.

About the author:
Janet Attard is the founder of the award-winning  Business Know-How small business web site and information resource. Janet is also the author of The Home Office And Small Business Answer Book and of Business Know-How: An Operational Guide For Home-Based and Micro-Sized Businesses with Limited Budgets.  Follow Janet on Twitter at http://www.twitter.com/JanetAttard.

 
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