Is it a good idea to incorporate a small business? Allow me to be direct – YES! Why? Whether your business is small or large, you must learn to manage risk. Incorporating your business can protect you from any personal liability which may arise due to any business loss.
Business formation is an easy process and can be executed completely online. You can either hire use online services such as Nolo.com, Inc.com or form the business yourself using DIY guide at BusinessEntity.org.
2008 and 2009 give us an excellent example of why incorporating a small business makes absolute sense. As we all know, these were the years of the Great Recession. All hell broke loose and things were so bad that discussions of a second Great Depression were legitimate fodder. The real estate market and banking industry were slapped around like a bad comedy skit, but small businesses failed right and left as well. When they did, the value of incorporating became readily apparent. How so? Let’s take a look.
Let’s say you have a small business making surfboards in San Diego. You sell them through surf shops and other retail stores. Things are going solid. 2008 hits and sales start dropping as people hoard their money for primary needs like food and such. Suddenly, you have a major cash flow problem and can’t pay your bills for materials, sowing, rent and so on. You struggle into 2009. Sales don’t pick up and you are forced to close the doors.
Now what? Well, the result is entirely different depending on whether you incorporated or not. If you did, the business owes a bunch of money to creditors. There is a shield, however, between that debt and you. Your personal assets are not on the line. You don’t owe anything, the corporation does. You are going to hire a bankruptcy lawyer who is going to tell all the creditors to pound sand and they are going to have no recourse against you.
Now take the same scenario, but assume you did not incorporate. What happens when the business fails? You are personally liable for the debts of the business since you own it. Since you didn’t incorporate, there is nothing to shield you from the creditors. What about insurance? There is no insurance that will pay the basic debts of a business. You, my friend, are in deep trouble and face the prospect of filing personal bankruptcy.
There are a host of reasons to incorporate a small business. However, you define them, they all boil down to the same basic issue – managing the potential risk should things go bad.