Why incorporate? Running a business can be risky. Bad things can happen that can impact you personally. Without an LLC, S Corp or other corporate structure, you are basically standing on a street corner with your worldly goods stacked up beside you, hoping nothing bad happens.
You need a big strong partner to stash your stuff and keep it safe. That’s what a corporation is. In the eyes of the law, a corporation is an artificial person, with most of the rights and responsibilities of a real person. You might call it your imaginary partner.
Your imaginary partner — your corporation — shields you from harm, protects your assets and helps you stay on the right side of the law. By incorporating your business, you are taking steps to reduce what attorneys call your “exposure” — meaning that you are not directly responsible for every action your business takes. While there are always exceptions, this generally means that if someone is harmed — or claims to have been harmed — by your business, he can sue the business, but not you personally.
Formally organizing your business also requires you to treat it as a real business, not just something you do in your spare time. As a corporation, it will have its own bank account, its own credit card and will be responsible for filing tax returns. If your business is profitable, it’s quite possible it will pay taxes at a lower rate than you would as an individual. If it loses money — and many businesses do — you and any other owners will be able to deduct a portion (or sometimes all) of the losses from your individual taxes.
There are several kinds of corporations. The most common is the LLC. The Subchapter “S” and the “C” corps are also popular with certain types of businesses. An experience attorney can help you pick the structure that’s right for you.