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Legal Corner: Should your business be incorporated?

By Everett Mechem

Should your business be incorporated? Generally the answer is almost always "yes." Rarely should a legitimate moneymaking activity be operated in your name ("doing business as") rather than as a corporation, partnership, or other hybrid-corporate entity.

The cost to incorporate n in time and money n is invariably much smaller than the risk you will face if you decide not to incorporate. Ultimately, the decision of whether to incorporate depends primarily upon whether you wish to keep your personal affairs separate and distinct from your business affairs.

The act of legally incorporating your business, large or small, creates a bright-line distinction between the personal and family side of your life from the business side.

For example, assume you are a young entrepreneur named Ford. As you design and build your first automobiles, hire employees, and enter into business contracts, you could conduct business as something such as "Ford Motors." On the other hand, you could incorporate and operate your new business as something such as "Ford Motor Company." If you operate your business as Ford Motors, without incorporating, legally what you do from 8 a.m. to 5 p.m. is not much different than what you do at home. Unpaid creditors of Mr. Ford's business could seek to have debts owed to them paid by going after Ford's office building, tools, and other assets just as they could go after the Ford homestead, livestock, and family property.

If young Mr. Ford incorporated his business, then so long as certain formalities are observed business creditors could only look to business assets n no more, no less n for satisfaction of unpaid debts or liabilities. Business creditors will not be given the option of trying to sell Mr. Ford's family house, horse, mule, or car if the business gets behind in paying its bills. Similarly, if a person is hurt or an employee is injured while test driving one of Mr. Ford's new cars, the cost of such an injury, if insurance does not pay, would put his personal property at risk the unless Mr. Ford had incorporated prior to the accident. It would be possible for the entire business to be sold in to pay the injured person for damages suffered.

The reason for this difference is that a corporation is a legal entity separate from its owners, thereby offering the greatest personal liability protection of any business structure. A corporation has all the rights, duties, and obligations that a natural person has. The only difference between a corporation and a regular person is the corporation can't think for itself n it owners and employees do.

That is why, in my opinion, incorporation is the least expensive insurance a business owner can have. As long as the proper legal steps are taken, incorporation will limit the recovery of business creditors to the assets of the business, and family-owned or personal assets generally will not be at risk. That bright-line distinction is very important. It allows new and growing businesses, as well as established ones, to limit the amount they have at risk to those assets intentionally used to back a particular business venture. The family home, cars, and furniture at not at risk even if the business fails, unless there was an intention to use them as assets or unless poor planning allows credits to ignore the existence of the corporation and go beyond its assets in attempts to collect for outstanding debts or liabilities.

Incorporation offers unequaled personal liability protection, and that alone is more than sufficient to justify incorporating most all business ventures. The good news is that additional benefits often result from incorporation, as well. Here are other benefits to business incorporation:

? Streamlined administration

? Allows for multiple ownership

? Allows for perpetual existence

? Division of voting power

? Decreases IRS audit potential

? Greatly increases Employee and Retirement Plan Options

? Provides business name protection

? Arguably provides prestige

? Forces often needed formality

? Allows for non-calendar year accounting

? Allows limitation of contractual liability

? Often eliminates self-employment taxes

? Allows easier access to capital investors

? May allow you raise capital without having to incur debt

? Easier estate and family planning

? Easier transfer of ownership if you sell your business

If the incorporation is properly designed and operated, your personal assets are protected and, unless fraud is involved, these assets cannot be seized in case of lawsuit or judgment against your business. With the number of lawsuits skyrocketing in the United States, asset protection needs to become a critical part of your financial planning. Many people feel that they don't need to protect their assets because they haven't done anything wrong. Today, you don't need to do anything wrong to be wiped out in a lawsuit. All you need to do is own something. Since your corporation is separate from you, it will protect you from an unfavorable judgment.

Remember, a corporation is a legal entity separate from its owners, thereby offering the greatest personal liability protection of any business structure. A corporation has all the rights, duties, and obligations that a natural person has. The only difference between a corporation and a regular person is the corporation can't think for itself n its owners and employees do.

Once you decide to incorporate the next question is what type of corporation is best for you.

Next Week: Overview of the four basic types of business entities: sole-proprietorships, partnerships, corporations, and limited liability companies.

Everett Mechem is a local attorney. He may be reached at Mechem@charter.net, (770) 954-3434 or at his office at 20 Jonesboro Street, McDonough. The opinions expressed herein are those of Everett H. Mechem, Esq. and nothing in this article is to be relied upon as legal advice or is a substitute for speaking with a licensed attorney.