So, you’ve decided to start a business. Congratulations! As you may have already discovered, coming up with an idea is the fun part – the real work begins when you try to monetize that idea. And once you’ve started booking clients and making money, you have yet another problem: it’s probably time to incorporate!
As we’ve discussed in the Overview, it’s a good idea to set up a separate entity for your business as soon as you can. It becomes especially important once you start producing revenue or entering into contracts with other people or companies. That’s because, without an entity, you’re on the hook if something goes wrong – and that means your assets are at risk.
Here’s a nightmarish example of what can go wrong if you fail to incorporate. Let’s say you run a moving business. While removing a customer’s window-unit air conditioner from their window, your grip slips – and the unit falls three stories to the street below, where it falls on a passerby. That person becomes paralyzed – and sues you for millions of dollars in damages.
This scenario is terrible in a number of different ways, and that’s true regardless of whether you’ve set up an entity. But here’s the key difference: if you’re running your business as a corporation or LLC, the injured person will have to sue your entity, not you personally, to recover the damages they seek. That means that your personal assets – your home, your personal bank account, your investment accounts – are shielded from exposure, and won’t be at risk in the event that the poor person crushed by the air conditioner wins a judgment against you.
If you don’t have an entity, well, things will look pretty bleak. That person will sue you personally, and all of the assets listed above will be on the table. You could lose your house, your life savings – everything. If the victim of the air conditioner recovers even part of what she’s seeking, you may very well be looking at bankruptcy.
As you can see, forming an entity is critical. What’s not so clear is what type of entity you should form. LLC? C-corp? S-corp?
Here’s a brief rundown of the differences between the structures, and tips on which one makes the most sense for you:
Choosing the right corporate structure for your company is a complicated issue, and one that you should discuss with an attorney. What’s a deciding factor for one business may be wholly unimportant to the next, so don’t base your decision on what other companies have done. Take your time and speak with your business partners and a legal professional before making a decision.