From the desk of Darlynn Morgan, Orange County Business Attorney

Your years of hard work have finally paid off.  The long hours, the networking, the devotion to your clients have all put you in prime position to open your own shop.

But not so fast…

Curb your enthusiasm for just a few minutes and think about how you should structure your business from a legal standpoint.  While starting out as a sole proprietorship and postponing any formal corporate structure may sound like a fiscally sound move to save initial start up costs, if you have a business that could be sued for any reason (and who doesn’t?), you may want to spend a little up front to save yourself from financial ruin in the event of a problem.

Incorporating your business can greatly reduce the effects of a potential loss to you personally in the event of a lawsuit.  Unfortunately, according to BizStats.com, only 22% of all the small businesses in America are a limited liability corporation, S corporation, or C corporation.  Over 72% of businesses are operated as a sole proprietorship and exposed to liability risk and a 5-6 times greater risk of tax audit.

Here are just a few reasons you should consider incorporating:

Liability Issues: A corporation is a separate legal entity from you personally.  Any debts incurred or lawsuits brought are against the company, not the owner.  Forming a business entity separate from you adds a layer of protection between your personal assets and potential lawsuits.

Raising Capital: Trying to get financing for a small business as a sole proprietorship or partnership difficulties almost impossible, especially in the current economic climate.  If you are going to seek out a line of credit or a business loan of any type, you are going to need to have a separate business entity established.

Taxes: Another considerable benefit to establishing a separate business entity is the taxation of the company.  Less risk of audit and tax savings make incorporation a good bet.

Growing the Business: Here’s the reality – if your business is not incorporated as an entity separate from you, it’s very likely you are not treating it like a real business.  That means you are very likely not growing the business as well as you could – less clients, less income, less impact.  When you treat your business like a real business (and incorporating it is the first step), you will see your income grow.

Selling the Business: If or when you decide to sell your business, it will have to be valued in order to arrive at a selling price.  You can’t just pull a number out of thin air.  If the business is not separate from you, it will be extremely difficult to sell.  While starting your own business entity may be a bit more costly and time consuming in the beginning than just putting up a sign and opening up shop, it’s the key first step to having a real business instead of just creating another job for yourself –one that doesn’t provide any vacation days or sick time.

And as with any other process with serious potential for legal issues down the line, always consult with an Orange County business attorney to determine what’s best for your business.  Call to schedule your comprehensive LIFT™ (legal, insurance, financial and tax) Foundation Audit today so we can identify   the best course of action for you.  Normally, this session is $1250, but if you mention this article and we still have room on our calendar this month for new client audits, we will waive that fee.