Q: Steve – I have run my business for many years as a sole proprietorship. Yet I heard you speak recently and as I recall you like entrepreneurs to form their businesses as some sort of corporation. Isn't that expensive? Is it really worth it? — Kim
A: There is no rule saying you need to run your business as a corporation, but what I have said, and do say, is that it is smart to do so.
Entrepreneurs know that taking a risk is part of the game, a fun part of the game in fact. But the best entrepreneurs also know that a key factor to winning the game is their ability to reduce risk to the extent possible:
- Sure, you can sink $500,000 of your own money into that new invention, but if it doesn't pan out, that is a BIG hit. Better: Find an investor, sell some of your equity, and reduce your financial risk.
- Maybe that Errors and Omissions insurance policy has gotten so expensive that you dropped it. That may be a quick, short-term fix, but the long-term ramifications could be disastrous. Better: Buy a less expensive policy so at least you have something, which, again, reduces your risk.
- Yes, you can sign that lease in your own name, but if for some reason you have to move out before the three-year term is up, you will be on the hook for the unpaid rent for the rest of the lease. Better: Have your corporation sign the lease.
A basic way to reduce risk and thereby increase your chance of success is to incorporate your business. There are many advantages, but the best one is that it creates a firewall between your business liabilities and your personal assets.
Without a corporation, if someone sues your business, they will also sue you personally, because you and the business are, legally speaking, one. If your business goes into debt, you will be personally responsible and liable for the same reason.
When you own your business as either a sole proprietorship or partnership, again, legally speaking, there is no difference between the business and you. So all your personal assets are at risk – your home, your investment portfolio, even your credit rating.
When you start a corporation, you are creating a separate legal entity, and it is this entity that will become responsible for corporate debts and liabilities. This is called the "corporate shield" because it shields you from personal liability for business debts.
Yes, incorporating can be expensive if you need to hire a lawyer to do it for you, as sometimes is the case, but just as often you can do it yourself. You can find some excellent books on the subject at Amazon.com or your local bookstore.
Which kind of corporation is best for you? There are several to choose from, and all have pros and cons. The basic types are C corporations, S corporations, and a popular hybrid called the Limited Liability Company (LLC). The right one depends upon your situation and goals. Any decent do-it-yourself software or book will walk you through the process.
The important thing is that you do walk through the process.
Today's Tip: Do you find that the line between your home life and your work life is blurring ever more these days? If you are like most entrepreneurs, the answer is a definite yes. A recent survey of small business owners and managers by Staples found that
- 62% work beyond a 40-hour week.
- 21% work another 40 or more hours.
- 21% work while eating dinner at least 4-5 times a week.
© 2010 Steven D. Strauss, www.MrAllBiz.com