Once you decide to start a business, one of the first decisions you’ll need to make is how your business will operate. You could just start selling your products or services without taking any additional steps. If you have something to sell, there aren’t many rules that keep you from just setting up shop.
Yep, that’s right. You can hang your shingle basically whenever you want, like Willie here. You might be #ridingdirty, but it’s legal!
<There are exceptions to this rule–for example: your state may have some license requirements depending on what you’re selling. Or, your neighborhood or city may have some restrictions on what kind of business you can operate out of your home>
Going the #ridingdirty route isn’t necessarily terrible, especially if whatever you’re doing is low-risk and you aren’t sure how long you’ll continue.
BUT, most people should incorporate their business. Some kind of incorporation is necessary for just about every legit entrepreneur.
“Incorporation” simply means that:
- You filed an application, which gives a state notice that you want to create a company, and
- The state reviewed that application and, if you met all the requirements, it officially registered your business in its database.
Here are three reasons why I think you should incorporate.
#1 It makes you legit.
If you want to be taken seriously as an entrepreneur by your clients, customers, and any other third parties (banks, investors, etc.), incorporating helps. People view incorporated businesses as more stable, more legitimate, and more trustworthy. Being able to use that LLC, Inc, Incorporated, etc. after the name of your business gives you street cred.
#2 It ensures your business can continue without you.
If you don’t incorporate your business, what happens when you die? Or what happens if you get hit by a bus and end up in a coma for several months or years? If your company is literally you, without a separate formal structure around it, it dies when you die. An incorporated business can continue no matter what happens to you.
#3 It protects your personal information and your assets.
A company that hasn’t been incorporated isn’t doing you any real favors. If you have to sign contracts, or apply for any kind of registrations, or participate in any other number of business activities, you’ll probably have to share your personal information–including things like your social security number (an incorporated business can have its own tax ID number) or your home address (an incorporated business can have its own PO Box or separate address).
Incorporating a business, and taking the few additional steps of establishing separate identifying information for it, gives you anonymity and protects your personal information.
Incorporating can also protect your assets–things like your home, your car, and the money in your personal bank accounts. Incorporating is the single. best. way. to protect your stuff.
An incorporated business has its own legal identity separate from yours. It incurs its own debts and liabilities. As Mitt Romney once said, “corporations are people, my friend” (he gave a horrible delivery and explanation, but he was basically *right* on the legal point).
Typically, if a business ends up in a lawsuit or being held responsible for some kind of activity, only the assets of that business, and not the personal assets of the business owner or shareholders, can pay the debt/liability. This essentially means that, as long as you’re careful to follow the rules, you can do business and take on the risks of doing business without worrying that you could lose your house and all your personal money if things go south.
There are other benefits that I won’t touch on here, including taxes, deductions and raising capital. These things are complex and involve complicated tax and finance laws and regulations. In general, however, if you’re planning to start and grow a business, it makes sense to incorporate.
Have you incorporated your business? Confused about when/where/how to incorporate? Drop a comment with your questions or experiences!