Why should I incorporate or form an LLC?

Why should I incorporate or form an LLC?

The primary reason is to protect your personal assets from the claims of the business' creditors. When a corporation or LLC enters into a transaction, it is the company and not the shareholders who is responsible. Creditors cannot reach beyond the assets of the company in normal circumstances. A corporation or an LLC by their very nature, have "limited liability". As a sole proprietor or partner, you have "unlimited liability" to your creditors and, therefore, all of your personal assets are at risk if the business fails, is sued or is unable to pay its debts.

Corporate shareholders and LLC members are not liable for the company's debts unless either they agree to assume the debts in writing or the company has not been managed properly or is guilty of fraud. In that case creditors are permitted to "pierce the corporate veil" and hold the owners liable for the company's debts.

The second reason many people incorporate or form a LLC is to take advantage of the tax benefits available to corporations and LLC's. These so called "employee benefits" may be available to your company.

Even though you may be the only shareholder or owner and only employee of your business, your company may still be able to deduct the full cost of health insurance, life insurance, medical insurance and other traditional employee benefits. Your company may even be able to adopt a pension and profit sharing plan. You should discuss these matters with your tax advisor to determine whether your company may take advantage of these benefits.