Why Should You Incorporate Your Business?

by Arina Shulga, founder of Shulga Law Firm, P.C.

Many entrepreneurs ask me whether they should incorporate their businesses.  Most often (but not always), I answer “yes.”  My reasons are below. 

1.  Credibility.  You should not rush into incorporating your business the moment you get a good business idea.  First, you need to research it: conduct market analysis, check out competition, evaluate the demand, potential sources of revenue, and assess the start-up costs.  This can be summed up in two words: develop a business plan.  If this exercise proves that your idea may become a viable business, then the next step is incorporation.  Having an “LLC” or an “Inc.” after your business name will add authority, credibility, and show everyone that you view your venture not as a hobby but as an actual business.  Perception is key!

2.  Personal Asset Protection.  Perhaps the most important reason for incorporation is that both corporations and LLCs allow their owners to separate and protect their personal assets.  If the company is properly structured and managed, owners will have limited liability for business debts and obligations.  For example, if your company takes out a loan and cannot later repay it, you personally are not responsible for repaying it (unless there is a personal guarantee).  Being a sole proprietor does not protect your personal assets.  Only forming a corporation or an LLC limits your personal liability for business debts and obligations. 

3.  Perpetual Existence; Easy Transfers.  Once you form a corporation or an LLC, it becomes a separate legal person.  Its existence may be perpetual, so a founder’s illness or death will not cause it to dissolve.  Further, if you no longer wish to be involved with the company you founded (maybe you decide to retire or have an extended vacation), you can sell or transfer your shares to somebody else.  The company will not dissolve because of that and will continue its operations.

 4.  Business Name.  Incorporation affords some protection for the business name.  In most states, like in New York, you cannot register a company under a name that is already taken by another company.  

5.  Raising Capital.  As an individual, your ability to raise capital to run your business in the early stages of its operation is limited.  It may be easier for a business to raise capital because it can do so in several different ways: it can borrow money or issue equity in exchange for an investment (or do a combination of both by borrowing money that later converts into equity).  As an individual, you can borrow, but you cannot issue stock.

Incorporation signals the market that you mean business.  If this is not the case, keep working on your business plan until you feel you are ready.  Forming a corporation or an LLC is an important responsibility.  As a founder, you will need to make many decisions on behalf of the company but also learn how to treat it as a separate legal entity. 

Arina Shulga is the founder of Shulga Law Firm, P.C., a law firm that focuses on representing small and growing businesses.  Arina conducts a monthly free legal clinic at NYC Business Solutions, Brooklyn Center.  She writes a blog, www.businesslawpost.com, and is active on Twitter (@Businesslawpost).  If you have a question or comment for Arina, drop her a note below.  And, please share this blog entry with your colleagues on Facebook and Twitter. 

Note that this blog is for informational purposes only and should not be relied upon as a legal advice. 

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The views, opinions, or expressions provided by Arina Shulga do not necessarily represent the views, opinions, or expressions of the City of New York, the New York City Department of Small Business Services, and/or NYC Business Solutions.