Should I incorporate my business? If so, what type of entity should I form?

I would recommend to most anyone that owns his/her own business or even anyone that receives a 1099 at the end of the year should consider operating as an entity. There are many different reasons why someone may want to do so, but the main reason is to shield yourself from personal liability.

People usually ask a very general question, "What is the best form of business?" Typically, once people worry about limited liability issues or take a look at insurance costs and worry about uninsured risks and those types of things, that’s when they may think about forming an LLC, a limited liability company. When they want to raise capital, or find that they’re making a little too much money and getting taxed on everything, then they may think of forming a corporation to shelter some money in their corporation.

An LLC is generally the best choice for an owner of a start-up business who seeks to limit personal liability. Most people who haven’t heard the news about LLCs often think of S Corporations, but really the LLC has replaced the S Corporation. The LLC lets you form a legal entity that insulates you from liability for claims against your business and at the same time, it keeps your current tax status. So if you’re a sole proprietor and you form a one-person LLC, you’ll continue to be taxed as a sole proprietor. If you’re a partnership and you convert to an LLC, you’ll continue to have your business taxed as a partnership, so you don’t change your tax status.

And another important part of it is if you’re ever thinking of having your business own real estate, it can be a very, very big mistake to form a corporation because you’ll get hit with double tax on the appreciation of any real estate owned by the business. That’s not true of an LLC.

Having said all of this, if you feel comfortable with your current level of insurance coverage, given the type of business you’re in, then you don’t really need to worry too much about your business form, at least for legal liability reasons. You may want to form a particular type of business for tax purposes, but the main reason to form an LLC or corporation for legal purposes is to limit your liability.

If you do actually have adequate insurance -- by the way, you’re in the minority -- but if you do, then maybe you can just go about your life and your business without worrying about this. But, for most people, that’s not true.

If you’re dealing with the public, if you have people come on your premises, or if you’re doing any kind of contract type of business with others, it’s just true these days that disputes often end up in court or have the potential to. It helps business owners sleep better at night to have this type of automatic liability insurance, this kind of automatic insurance they obtain by incorporating or forming an LLC.