Choosing a business structure is a critical part of the business startup process. The structure you select will most likely have a significant impact on your personal liability as well as your tax liability.
There are many benefits of incorporating your business and the most important ones include asset protection through limited liability, corporate identity creation, perpetual life of the company, transferability of ownership, build corporate credit and raise capital, flexibility with the number of business owners, and tax savings.
A properly formed corporation is recognized as a Separate Legal Entity with its own Federal Tax Identification Number. The corporation is responsible for its liabilities and its debts…NOT the owners.
Example: Defaulting on a Lease
For example, let's say ABC Corporation has $1,000 in corporate assets (cash and computers). Business is slow and there is 12 months of rent remaining on the lease. If ABC Corporation was properly formed, and if the lease was executed by “ABC Corporation”, the landlord will only be able to reach the $1,000 of assets within the corporation. The shareholders (or owners) of the corporation will most likely NOT be liable for any payments remaining on the lease.
Here, the corporation served its purpose and provided true asset protection for its shareholders.
A sole proprietor (or partners in a general partnership), by contrast, is personally liable for all business obligations. Therefore, the business owner who did not incorporate or form an LLC (Limited Liability Company) may lose his/her personal assets to satisfy the debts or judgments including their homes, cars, and personal savings and investments.
However, any benefits of incorporating may be lost where the business commits fraud, neglects corporate formalities, or commingles assets.
For true asset protection, and to avoid personal liability, most business owners should incorporate a business. A properly operated corporation or LLC limits the liability of its shareholders to the amount they invested in the company… in most cases :)