Why should I incorporate?

For entrepreneurs who are thinking about starting a new business, the question of when to incorporate is important. Find out how easy it is to file for an LLC.

Why should I incorporate?

If you have a business, whether it is a sole proprietorship or a partnership, you should seriously consider forming it into an LLC. It will provide you with similar legal protections as a corporation, but will allow you to run your business as a small business.

Creating an LLC has several advantages that may or may not be important to a business owner. But, regardless of any other factors, a business owner needs to form an LLC when he or she starts making profits or taking risks.

Anyone starting a business, or currently running a business as a sole proprietor, should consider forming an LLC. This is especially true if you are concerned about limiting your personal legal liability as much as possible.

The drawbacks? No entity is perfect. And yes, the LLC is not ideal for every business.

In fact, one of the biggest drawbacks is that it is not particularly good for raising money, especially from venture capital firms.

It is difficult to structure protections in shares (such as priorities with dividends and settlements), the governance tends to be too flexible (there is no board of directors) and even the pass-through tax feature can be a problem (the reason being that VCs can have tax-exempt investors).

Therefore, if you intend to raise significant amounts of money, you should probably consider the C-Corp. Most of the time, the LLC will overcomplicate things and may even scare away potential investors.

Creating an LLC is a good way for business owners to limit their liability for the company's debts. 

Generally, you will need to create an LLC operating agreement setting out the rights and duties of members and managers (similar to the articles of incorporation), file certain forms with the appropriate state agency (often the Secretary of State) and pay a filing fee.

Insurance can also protect your personal assets in case your limited liability status is ignored by a court.

In most cases, the LLC will protect your personal assets from claims against the company, including lawsuits. The owners are not personally liable for the debts or obligations of the business, which means that their personal assets are protected.

A sole proprietor's personal assets are fully exposed to creditors and lawsuits because, legally, the sole proprietor is the business. This means that creditors or plaintiffs can reach into the owner's personal assets to satisfy a debt or judgment.

An LLC will allow you to protect your assets while giving you the flexibility to structure your operations at your discretion.

A good liability insurance policy can protect your personal assets when limited liability protection will not.

Generally, this means that the company's debts and other claims on the company, including liens and lawsuits, are limited to the company's own assets.

In most states and in most circumstances, the holders of such liens against the company cannot pursue the personal assets of the company's owner(s). A serial LLC is an LLC whose articles of formation permit unlimited segregation of members' interests, assets and operations into separate series. In addition to protecting your personal assets in such situations, insurance can protect the assets of the LLC from lawsuits and claims.

Because you are not personally liable, creditors or individuals bringing claims against your LLC cannot collect against your personal assets, such as your personal bank accounts, personal car or home.