Incorporating and Legal Stuff

• What is incorporating my business? 
• Do I need to incorporate?
  
• What is the ‘blanket of corporate liability protection’? 
• How much does incorporating (such as forming an LLC) cost? 
• What are the benefits of incorporating?
• When do I need to do this?

What is incorporating my business?

Most business will want to incorporate legally before starting to conduct business. There are tax benefits to incorporating, and there is also something called a ‘corporate layer of liability’ which protects you personally from any liability that the company may be subject to.

In plain English, if someone sues your company for whatever reason and wins, they can’t come after your personal assets, they can only come after the assets of the company.

For most small businesses the choices are:

Sole Proprietorship – This is the easiest to set up, it means you are doing business as yourself. The taxation is pass-through. Read more on Sole Proprietorships here >>

LLC (Limited Liability Corporation) – This is a fairly easy business entity to set up and manage, and it gives you the corporate liability that protects your personal assets.

S-Corporation – This is a little more cumbersome than the LLC to manage – there are a few more rules to adhere to, but not many. One of the major advantages of S-Corp formation is that S-Corps do not require you to pay self-employment taxes, unlike the LCC. This can save you a lot of money.

There are other choices too, you can learn more about all of them here.

What other business filings, registrations, licenses do you need? You should Google this for your city and state to see what local permits or licenses you may need, it can vary by business type. 

For the most part, your city will want you to get a business license (inexpensive). The state may want you to file your incorporation papers (in California, an LLC annual franchise tax fee will cost you $800 annually – but you don’t pay it during your first year).

Other legal things to look out for:

If you take on a partner, make sure to put together a contract that spells out what the arrangement is, and how to dissolve it in the event you aren’t getting along.

Never do this on a handshake without proper paperwork because if things get sticky, and they often do, you will undoubtedly have a difference of opinion about what the agreement was, so the paper contract will be key.

Do I need to incorporate?

No you don’t have to. But as mentioned above, incorporating gives you a blanket of liability protection against anyone who might be upset with you and try to take legal action against you. Incorporating is recommended in most cases.

This added shield of liability is the reason most businesses DO incorporate, combined with tax benefits of incorporation. The most common form of incorporation for a small business is the LLC (Limited Liability Corporation).

If you are just starting a business and have no customers yet, or just a few, you might decide to wait on incorporating, until you are sure you have a viable business on your hands.

I often tell people “consider waiting until you’ve taken in a  thousand dollars or so in revenue” before you spend the added time and money to incorporate. NOTE: This does leave you open to some risk, if one of your early customers decides to sue you.   

However, I hate to see people spend money on all this only to learn that their business idea isn’t working at all, as it just adds to their loss. If you’re doing a business that could be risky and you think it could result in someone suing you, OR if you have substantial assets that you want to make sure to protect – incorporating first is probably a good idea. You’ll have to weigh that risk for your situation.

What is the ‘blanket of corporate liability protection’?

If someone gets angry and decides to sue you over something related to your business, and takes you to court, you could potentially lose that case. There’s a chance that the angry party could sue you for all you have, including your personal assets such as your home, personal bank accounts, car, etc. Nobody wants that to happen.

The protection against this scenario is to be doing business as an incorporation such as an LLC, or an S-Corp (these are the two most common for small businesses).

When you are doing business as a corporation, the government sees the business entity as the one responsible. That’s your incorporation. As long as you are doing business as your corporation, and not as yourself, by following the guidelines for your state, then the angry party could come after the assets of the corporation, but not your own personal assets, because they are doing business with your corporation, not with you personally.

How much does incorporating (such as forming an LLC) cost?

Annual costs:
In California, an LLC annual franchise tax fee will cost you $800 annually – but you don’t pay it during your first year. You will probably pay your accountant or tax preparation person a few hundred dollars extra for handling the books and or taxes for your LLC.

How to form your LLC (also called incorporating):

Cheapest way:
You can do this yourself by going to your state website (in California it’s the Secretary of State website here: https://www.sos.ca.gov/business-programs/).  It can be a little confusing, but lots of people do it themselves and there are instructions.

Also fairly inexpensive:
Use an online site that specializes in Business Incorporations such as LegalZoom or RocketLawyer. There are many online. But if you choose this path, make sure to choose one that has Customer Support via phone or chat. You will definitely have some questions and need a little help, so make sure they have good support via chat or phone!

Here is a good list of good online incorporation services:  https://www.incandgo.com/best-incorporation-service/

Easier, but a little pricier:
Choose an attorney who performs business formation services. There are a lot of attorneys who specialize in this area and they do it faster and cheaper than some other, so get a few quotes.

The reason using an attorney is nice is because there will be a human there to hold you hand and talk you through all the choices, discuss tax implications, and they will handle everything for you. All you need to do is make some decisions with them, sign some papers and pay the fees.

What are the benefits of incorporating?

From above, the corporate liability protection, and various tax implications. It’s a good idea to contact a tax specialist to learn more or google this topic, as we won’t be covering all the tax laws on this site.

When do I need to do this?

Don’t do it right away. Wait until you’ve gone through the steps of researching, planning, working out any outstanding hurdles, and testing your idea. When you finally decide that you’re definitely moving ahead, that is a reasonable time to incorporate – or you could wait until you’re really ready to launch the business and expose it to the world. That’s fine too.

The big thing is that since incorporating affords you the blanket of liability protection, you want to do it before the public has a chance to see or use your product so that in case someone wants to sue you, you aren’t personally liable.

Many entrepreneurs wait until they have a small handful of paying customers and have earned a few thousand dollars of revenue, which signals that there’s a viable business. That is a great time to incorporate if you haven’t already done it.

What other business filings, registrations, licenses do you need?

You should Google this for your city and state to see what local permits or licenses you may need, it can vary by business type. For the most part, your city will want you to get a business license (inexpensive). The state may want you to file your incorporation papers (in California, an LLC will cost you $800 annually!).