What Structure to Incorporate

Deciding which business structure to incorporate is a critical, at this point in the guide, we're now discussing the decision between Corporations and a Limited Liability Company. Leaving out Sole Proprietorships and Partnerships as we are going to be covering only the incorporated business structures going forward. As mentioned earlier in the material, the decision at the time of incorporation on the business entity type is the foundation for your enterprise - careful consideration is necessary here.

Lets examine the crucial factors that need to be considered before you incorporate. Primarily those being:

Liability Protection
Taxation
Your Personal Situation
Ownership
Transferability
Protecting Yourself From Business Liability
What type of business are you incorporating? What is your exposure to business liability? Do you have or plan to have employees? These are just some of the questions that start the analytical process of choosing the right business structure to incorporate. Always remember what another individual did may or may not have been right for them, so tying all of this into your business, financial scenario and personal situation is incredibly important.

Lets weigh some simple cost vs. benefit between a Corporation and LLC. Corporations have a long standing history of proving themselves in the courtroom, protecting shareholders from business liability and obligations. When a corporation is properly established, maintained and operating formalities adhered to, there isn't anything better to protect your personal assets from business liability. Now we can add some counterweight to the situation; Corporations are more formal than LLC's, there is additional maintenance involved when you incorporate a Corporation. Does your type of business require such levels of liability protection where the additional formalities are outweighed by the security of hundreds of years of courtroom performance protecting business owners?

The Limited Liability Company is the new kid on the block as far as incorporated business structures go. These entities lack the historic protection performance of Corporations. With that said, LLC's are much less formal and far more flexible. Just as easy to incorporate, with less maintenance. The liability protection is still there, however its very difficult to challenge the protection that Corporations offer. Do you have a small business that requires minimal liability protection and you are incorporating for tax advantages and a credible business presence?

Both types of entities have their share of maintenance. Corporations lead the charge with a more rigid structure and the requirement to hold shareholder and director meetings, on at least and annual basis. A Corporation and LLC will have to file an annual report each year with your state of incorporation. Both entities are required to maintain a registered agent as a matter of public record. No matter which one you incorporate, you will file a statement of information, or annual report, each year on the incorporation anniversary with your home state. Being incorporated means that you will have a financial and tax scenario on top of that of yourself. More on taxation in the next section of the incorporating guide.

As we progress, we can take a step back and you can consider the type of business that you're in and your true needs as far as incorporating your business. As we review the liability protection offered by both Corporations and LLC's, what we have is an impeccable scoreboard with Corporations proving themselves over and over in a courtroom and LLC's needing some time to be challenged in court to achieve the historic levels that are innate to Corporations. If liability protection is your chief concern, you may not even blink at a couple extra administrative demands throughout the year. Otherwise, if you are looking for strong liability protection and additional flexibility an administrative convenience, the Limited Liability Company is a perfectly suitable option.

You may be incorporating to protect your personal assets from business liability. Another question you may ask yourself is how much do you stand to lose? If you have a substantial financial foundation which is put at risk through your business transactions, you may weigh the downside of a huge loss against the list of corporate formalities and know right away that a Corporation is right for you.

It is always important to bring the situation back around, regardless of the type of business you choose to incorporate. By incorporating, you are forming a distinct separate legal "person" or entity. The entity is responsible for its own debt, obligations and liability. The owners of the entity are shielded from this, which is called the "Corporate Veil". If any formal business structure ever acts as an alter ego of the owners, this compromises your separate legal status. When a creditor reaches the personal assets of a business owner, this is known as "Piercing the Corporate Veil". No matter what entity you choose to incorporate, operating the business as a separate distinct legal entity is always a must. The more separation you have from your person and the business, the more you are protected. If you act as one, you could be viewed as one in a court of law. This is very simple and Companies Incorporated offers a full range of compliance services to help customers maintain their business after incorporating.

Next Section: Incorporation Tax Considerations