Do I Need a Corporation?
One of the most common questions I receive is "Do I need a corporation/LLC or other entity?" There are a few factors to consider when determining whether or not to incorporate a business or form an LLC. The most common ones are liability protection, tax savings and marketing. Sometimes a single factor is enough to make the decision and for some businesses it is a combination of two or more factors that sways the decision. I'll touch on each factor below: Liability Protection The most important consideration is protection from liabilities arising from the business. Liabilities can be divided into three main categories: Actions, contracts and debts. Using a corporation or LLC can provide protection to the owners for actions taken by the business. Most importantly, the acts of employees. Employers are generally responsible for the acts of their employees, done within the scope of employment. The courts, especially in California, will usually make a very broad interpretaion of the scope of employment. Thus, an employer risks a huge potential liability for the acts of each and every employee. A business with employees should usually be conducted in an entity, such as a corporation or LLC. Since a person is always liable for his/her own actions, this form of liability protection would not be as important for a sole proprietor without employees. Liabilities can also flow from breach of contracts. If your business fails to deliver an important order to a customer, you may be hit with a breach of contract lawsuit. If the business is conducted through a corporation or an LLC, the customer can only sue the entity for breach of contract, not the individual owners of the business. If your corporation/LLC borrows money and fails to repay the loan, you can put the corporation/LLC into bankruptcy without personal liability. However, when a corporation/LLC borrows money, a personal guaranty from the owners is usually required. A personal guaranty would negate the liability protection for borrowed funds. Tax Advantages There are a variety of tax advantages available to entities which are not available to sole proprietors. Consult with your CPA or tax professional regarding the most advantageous entity for your particular situation. Some CPA's can make a corporation or LLC pay for itself with as little as $40-50K in annual net profit. Marketing A corporation can make a business seem larger than it is. You may be operating a business out of your garage, but if it is named Vandeley Enterprises, Inc., it can help you appear larger than it is.