Incorporating Your Small Business

…will reduce you’re your financial liability. If you're running a small business as a sole proprietorship or a general partnership, be warned, everything you own is at risk. Your house your car and your lawn mower could all disapear. A lot can go wrong when running a business, most of what goes wrong will be out of your control. The best way to protect your assets is to separate yourself from your business. Forming a corporate entity can separate your personal assets from your small business, but, what type of corporate entity is necessary.

Which Entity is Right for Your Small Business?

You have several choices when it comes to your business entity. The most basic is a
sole proprietorship, followed by a partnership (general or limited), a limited liability company ("LLC") and a corporation (either a general "C" or “S”).

Small business sole proprietorships

Although sole proprietorships and general partnerships are relatively straightforward and inexpensive business entities to establish and maintain, neither of them protects you from personal liability.

If you're a sole proprietor, you've probably made this election by default - by doing nothing other than starting a part-time Internet business out of your spare bedroom. That’s right, when your friends ring up and ask what your doing you can tell them that your busy running a sole proprietorship.

Protection Offered by Limited Partnerships

A limited partnership will protect the limited partners from personal liability beyond the extent of their capital contribution to the partnership, but legally, limited partners cannot participate in the management and control of the business. If you’ve bothered to read this article than you’re probably interested in the day to day running or your business. Needing to control and manage your own business is most likely non-negotiable, making incorporation all the more attractive.

How Does Incorporating a Small Business Protect Individuals Against Personal Liability?

When you form a corporation (or an LLC), you're forming a separate legal entity. This separate legal entity has the power to enter into contracts, own and dispose of assets, hire and fire employees and generally do anything that a sole proprietor could do. The difference between the corporation and the sole proprietorship, however, is that only the corporation's assets are at risk, not the owner’s or the shareholder's. The capital invested in the corporation is still at risk but your house and car are safe.

Simply Incorporating Is Not Enough To Protect Your Assets

As a director and shareholder, you must run your corporation or company (if an LLC) as a separate legal entity, not your alter ego. This means you can't just call your self a corporation without at least acting like one some of the time. Luckily arriving to meetings by helicopter and holding high pressure meetings are not necessary.

If your corporate structure is nothing but a sham designed to unfairly protect you from personal liability, a judge will have no qualms about piercing the corporate veil. However if you follow all corporate formalities such as those set out in the by-laws, passing board and/or shareholder resolutions for major decisions and holding annual meetings of the shareholder(s) to elect the directors and directors' meetings to elect the officers you’ll be all right. This really sounds a lot more complicated than it is.

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