I AM A ONE-PERSON OPERATION, SHOULD I BE A SOLE PROPRIETOR OR SHOULD I INCORPORATE?
Posted by Bob Voss
This subject gets asked of me a lot, and since it is rather complicated, I have decided to answer it in two blog posts. In Part #1 of the answer I will talk about liability protection and separating your personal assets from your business assets, and in Part #2, I will discuss taxes and the different ways you can pay yourself depending on the type your business organization. One of the best ways of thinking about the different type of business organizations is to look at how your state or the federal government looks at you and how they look at a business organization. For example if you go to the Secretary of State of your individual state and get a Certificate of Assumed name you are considered a Sole Proprietorship. This is the simplest form of business organization and in Minnesota for example the fee is only $25 by mail or $35 on line. You can then take the Certificate of Assumed name and get a business checking account. FYI, in some states, the name has to be published in a newspaper as well before it is considered valid. The state and the federal government both will then recognize your business, but because you are a sole proprietorship, the business is looked upon simply as you. From a liability standpoint this is not good. If your business does something wrong, not only is your business at risk for fault and damages, but so are you personally, and most, if not all, of your personal assets have been put at risk. For the most part, you and business are considered by the state and federal government as one and the same. If separating your personal and business assets is not important to you and don’t worry about anything really bad happening to your business, then a sole proprietorship might be OK.
One of the major advantages of becoming a Corporation (“S” or “C”) or an LLC (Limited Liability Company) is that the state and federal governments look at you and your business independently. They no longer look at you and your business as the same thing. They look at you as the individual and your business as something completely separate. By incorporating or becoming an LLC you have separated your business assets from your personal assets, and your personal assets are no longer at risk for something the business does. I caution you here, every state is a little bit different so check with your Secretary of State and get your specific states information, not every state recognizes every business organization. If you go to the free stuff on the site I have included the web addresses for all 50 Secretary of States. Probably the biggest advantage then of being a Corporation or an LLC, is that the state and federal governments look on you and your business not as the same thing, but as two separate things. Because they look at two rather than one, your personal assets are not looked on as part of the business. Becoming a Corporation or an LLC gives your liability protection from something the business does. I recommend that all new businesses go the extra step, and pay the extra dollars to become a Corporation or an LLC. I do practice what I preach; Bizowner Training is a Limited Liability Company.
This is really important! Just because you go to the state, pay a fee, and get the notarized document back from the state to become a Corporation or an LLC, does not mean you now done. You have to act like a Corporation or an LLC, to be considered by the state and federal government as a “real” Corporation or LLC. This means you have to have Articles of Incorporation, or Member Control Agreements. You have to have annual meetings, even if you have only one shareholder or one member. You need a Corporate Record Book. You have to file annual renewals, and yes, you must pay your taxes.
If you don’t do all this stuff, your liability protection could be voided, because a judge might say you were not really acting like a corporation or LLC, you were acting like a sole proprietor. Keep your liability protection in place and follow through on the legal details of your business. I do encourage everyone starting a business to work with a competent attorney or accountant to get the legal foundation of your business solid before going forward!