To Incorporate or Not To Incorporate...

The 2nd Best Way to Not Get Sued is to Incorporate:
But the best way to avoid getting sued is to be dirt poor, really. If people don't think you (or your family) have any money, they won't bother trudging down the long hard slog of a full blown lawsuit. They may threaten you, they may speak poorly of you...but words are cheap. Actually suing somebody takes a lot of work, and people expect a pot of gold at the end of their lawsuit, or they just won't have the stamina for it. They will be looking to see if you have any money.

If you do have significant assets then incorporating is a good idea. What counts as "significant assets"? About $100,000. So, yes, if you own a home, or if you have a nest egg, then you should incorporate. Also, do you come from a wealthy family that is in any way connected to (or do they talk with you about) your business? If yes, then incorporate.

If you plan on getting a line of credit from a bank, that's another good reason to incorporate.

Also, if you want to establish yourself as a vendor for a large corporation (and not a 1099 contractor), it can be easier if your business is incorporated. 

If none of these apply to you, don't bother incorporating. Being a sole proprietor is an honorable path, and an open declaration that your fate and the fate of your your business, are woven together. As a sole proprietor, your money and your business' money are one and the same.

"But wait!" you say. "I still want a corporation! Just...just because!"

Check that voice in your head. Is it saying something like, "Hey! I want Inc. at the end of my business' name just because it feels like the real deal!" If any part of you says, "Yeah! I want to feel Big Time!" then pause. Save your money for now, and go work on your brand identity or something. Incorporating to get a sense of validation is bad for business.

But, let's say you decide you do have a good reason to incorporate. What then?

Do I Get a Lawyer or an Accountant?
Don't set up your incorporation through your accountant. Accountants will try to save you a few bucks, that's their job, but a lawyer will be focused on mitigating asset risk —and that's the whole point of getting incorporated. Remember, you are only incorporating as insurance against somebody seriously trying to sue you. So if a lawsuit does show up at the door, you'll be happy you spent the extra $1,000 to have your corporate veil lined with lead...otherwise, just don't bother doing it at all.

Get a lawyer to set up your filings for incorporation, partnership agreements, and your boilerplate contracts for your clients. Don't mess around with cheap online law groups. If you're going to do do this, do it right, and get a real lawyer.

What about setting up my business as an S-Corp? If you know it will only be you owning the business (or maybe you and a super solid partner to split 50/50) then you can get an S-Corp. An S-Corp will save you a few bucks, so accountants often recommend this business structure...see above. Basically S-Corps are old school, but if you aren't building anything elaborate, an S-Corp will do just fine as a way to protect your assets.

So should I get an LLC? The short answer is...probably. LLC's are flexible creatures that can have any number of owners (called members), and you can split up profits (called units) in different ways. LLC's can even own other LLC's, as if they were fully independent people (but that's another subject entirely). So if you are unsure about who, how, or what will be owning (or be owned by) your business in the future, then definitely get an LLC.

What about a C-corp? A C-corp is for the Big Time. C-corps can have different classes of stock (preferred stock, common stock) and different ways to distribute that stock. It's all very complicated, and then there's the double-taxation. Basically you'll know it's time for a C-Corp when people start asking you if they can invest in your business. That's when you know you made the Big Time, and you can start paying more taxes as gratitude for your blessings.

What's That About Taxes?
A C-corp is its own legal entity. So any money it pays out (even to an owner) is taxed as a separate transaction. That means as a business owner, your company will pay taxes on all the profits it receives first, and then you personally will pay income taxes on any money the C-corp paid out to you as an individual. That's what people mean by double-taxation. With an S-Corp or an LLC, the profits are "passed through" to the business owner, and you only pay taxes on that money once.

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