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Business Planning Issue - Do I need to Incorporate my business?

As a general rule we always advise new business clients that they should operate all business enterprises in some form of a corporation or limited liability company. In order to understand why, it is important to understand the concept of a corporation. Simply put, a corporation, or the more recently developed limited liability company, is a separate and distinct legal entity. It can own property, can be sued, and can sue in its own name. In other words it can almost be thought of as a legal “person” that can operate a business enterprise in its own name.

Primarily a corporation, or limited liability company, provide a shield for liability to the owners. As a shield the corporation prevents the liabilities of the company from being transferred against the assets of the individual owners. Although there are some limits to this concept, the corporation, when properly administered, is an effective tool for protecting the personal assets of the owner.

In addition to the liability shield, the corporation can assist with keeping track of shared expenses and income where there is more than one owner. This is particularly helpful where there may be two or more owners that contribute to the operation of the business and the agreement between those owners calls for different payments based on financial contribution or work performed on behalf of the entity. Keeping the assets of the corporation separate rather than comingled with one of the owners assists in keeping track of those contributions and payments.

There may be other benefits to operating a business as a corporation of limited liability company. Business owners should consult with their legal and tax advisors to further discuss the concept.