Should I Incorporate My Small Business?

Person seeking legal advice on-lineLike everyone else, I suffer through the endless advertisements that permeate our radio airwaves and television screens.  The most annoying of these ads - for me, as a lawyer, - are those for LegalZoom and other legal service groups.  One such ad recently caught my attention.  The announcer informed me, and all others listening, that, if I did not incorporate my business, I ran the risk of “losing everything.”  He gave dire predictions about my financial security, if I failed to heed his warning, and noted the importance of going to his web site to get my business incorporated before the tragic loss of my company could occur.

Fortunately, as a lawyer who advises small business on such issues, I knew that the announcer was flat wrong.  While incorporation might be right for some, for a variety of reasons, incorporation is no guarantee of protection for the personal assets of the small business person. 

Like most other legal issues, there is no single answer to any question and certainly no single answer that addresses whether or not there is a need to incorporate your business.  The scare tactic used in this particular advertisement is a classic example of the need for care and consideration in decision making with regard to incorporation. 

Not so long ago, I consulted with a client concerning the need to incorporate his small business.  We discussed the nature of his business, which involved him personally providing services to the public. His business was a service business, where he was actively involved in the day-to-day interactions with his customers.  In addition, he ran his business from his home, which he and his wife owned.

In evaluating his circumstance and whether or not incorporation made sense, we determined that the decision would need to be based upon the tax issues presented by his business, not liability protection issue.  He and I then consulted with his accountant. 

The decision with regard to liability protection came easily for this client.  In his circumstances, where he was the chief provider of services to his company, incorporating the business could not and would never shield him from personal liability for his actions, without regard to whether he incorporated his business or not.  Since he was the chief employee and the main provider of services, the protection afforded to his corporation would not shield his personal conduct in providing services to his customers.  Likewise, since he operated from his home, the formation of a corporation would require the division of his personal residence into corporate property and personal property or the wholesale transfer of his home into corporate ownership.  Neither his accountant nor I recommended such a transfer.

In the circumstance of this client, the solution to his liability concerns was much easier than incorporation.  We recommended that he buy a comprehensive liability insurance policy for his business.  We discussed the nature of the risk and the potential liabilities and recommended appropriate policy limits for that insurance policy.  In this way, he avoided the need to incorporate, provided both himself and his business appropriate levels of liability protection, and continues to operate successfully.

The moral of this story is that there is no single answer for most legal questions.  The notion that an online form can offer you advice on any single issue is simply wrong.  There may be circumstances where a form will adequately provide the legal service that you need.  However, to make the determination as to whether a form is appropriate or not, you should always consult with competent legal counsel.  If you choose your legal counsel well, there is usually no charge, or a very nominal charge, for an initial consultation.  A good, reputable lawyer, with an interest in building a practice, will make appropriate recommendations to you.  For instance, in our firm, if we believe that you can accomplish a task without legal assistance, we will direct you to do so.  Though it is rare that legal circumstances permits such easy solutions, where they are appropriate, we always make them available.  To schedule your free consultation, call us today at 855-522-5291.

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