When and Why to Incorporate Your Business - Or Not

Before we get too much deeper into this subject, let me share a key piece of information with you..."in the spirit of full disclosure," as attorneys love to say. The ideas I'm about to spell out should not be construed - there's another legal term for you - as legal advice. Why? Because I'm not an attorney. Actually, I'm a law school drop-out, which means I know just enough about the law to get myself in trouble. The ideas that follow are good ones, but you should discuss them with a licensed attorney, ideally one who works with small and start-up businesses.

Let's begin with what types of businesses should incorporate and why. If your business is benign, meaning incapable of doing any type of damage to your clients, customers or patients, there should be no need to incorporate your business. What's a "benign" business? Let's say you paint portraits. The chance of you physically harming anyone with your finished product is slim to none, so there's virtually no chance of anyone suing you for having caused them painful injury or physical damage.

Now let's say you've developed the most delicious BBQ sauce in all the word. Friends and neighbors who've eaten your BBQed ribs at your home rave about it. Some have even told you you should bottle it and sell it. That's enough to make your eyes light up 'cause there's nothing more fun than making money doing what you enjoy doing, right? Wrong! Taking that well intentioned advice, you head for your kitchen, cook up a batch, bottle it and start selling it.

First of all, in most states you can't prepare food for commercial sale in a private, residential kitchen. But it gets worse. A week later, someone who bought a bottle and used it gets food poisoning and decides it was your BBQ sauce that made him or her sick. Maybe it was, maybe it wasn't, but they decide to sue you for the cost of their doctor and hospital bills, their time off from work and anything else they can put a price tag on. If you didn't incorporate your business, some or all of your personal assets - house, car, savings account, etc. - can be taken to satisfy that law suit.

If you've taken the time and made the modest investment to structure your business as a corporation, in virtually all cases those personal assets can't be touched by that type of court judgment I just described.
But if your business is structured as a sole proprietorship - including a DBA (Doing-Business-As) - those same personal assets of yours are also at risk. The same is true if your business is formed as a partnership. In a partnership, all the personal assets of each partner are "jointly and severally" at risk. Yes, another legal term.

It's enough of a risk to start a new business. Why add even more risk to your venture by not talking with an attorney before your take your first step? Because you might save a few hundred bucks? At the same time risking perhaps hundreds of thousands of dollars? That doesn't make much sense, does it?

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