I understand the hectic schedule and day-to-day reality of today’s working mom. I juggle between being a business owner, entrepreneur, wife, and mother of four. And I know that in the flurry of dreaming up ways to expand your client base, planning your advertising, managing playdates, and carpools, it’s all too easy to put off some of the legal aspects of your business.
I’ve come across many working moms and female entrepreneurs who consider their businesses too small to worry about incorporating or forming a Limited Liability Company (LLC). However, incorporating a business or forming an LLC is an essential step to protecting your personal assets (such as your personal property or your child’s college fund) from any liabilities of the company.
This means that if your business happens to be sued, your personal assets (i.e., property, savings accounts) are shielded from any judgment.
Of course, if you’re like most business owners, liability is farthest from your mind (unless you’re running a medical office or daycare center). After all, your primary goal is to please clients, not spark a lawsuit. And if you’re a freelance writer, it’s hard to imagine that sitting behind your computer can put you at any real risk of a lawsuit.
Things can happen.
For example, you could mistakenly plagiarize someone’s work. You could find yourself accused of slander. One of your major clients could skip out on payments, making it impossible for you to pay your own business accounts.
I’m not a fan of unnecessary scare tactics, but I am a fan of education. Yes, these are worst-case scenarios, and there’s a slim chance you’ll ever run into legal problems. But unfortunately, we live in an extremely litigious society. And if you’re sued as a sole proprietor, you’ll be sued personally. That means that everything – from your children’s college fund to your retirement savings – is at risk.
Maybe you’re just starting out and don’t have any significant assets to worry about yet. You still need to pay attention to liability matters, as creditor judgments can last up to 22 years. If you’re sued today, your personal assets are vulnerable up to 22 years down the road … long after you’ve become a huge success. Therefore, you need to think about protecting not only the assets you have today but whatever you’ll have tomorrow. And I don’t have to tell you that a lot can happen in 22 years.
What’s the solution?
Once your business is incorporated (either by forming an LLC, C Corporation or S Corporation), it exists as a separate business entity. This means that the corporation (and not you, the owner) is responsible for all of its debts and liabilities. This is known as a ‘corporate shield,’ and it will help protect you from unexpected risks in your business.
Which business structure is right for your business?
Your choice in legal structure can impact the taxes you pay and how much paperwork you’ll have to contend with. The three most popular business structures in the U.S. are the LLC (Limited Liability Company), S Corporation and C Corporation:
1. Limited Liability Company (LLC)
An LLC is a hybrid of a partnership and corporation. There are no shares. An LLC’s main benefit, as the name suggests, is to limit the liability of the owners (separating your personal property from company property). An LLC does not file separate taxes; all company profits flow through to the owners and are taxed at the personal income rate.
2. C Corporation
A C-Corporation also known as a “C-Corp” or also sometimes referred to as a “General-For-Profit (GFP) Corporation is a legal entity. There are strict requirements to form and dissolve it. A C-Corporation can earn money, take out loans and be sued (again, this is a major benefit, since liability shifts from the owners to the corporation itself). A C-Corp is taxed separately, and the company must file its own tax returns. And a C Corporation can attract investors and earn capital by issuing stock.
3. S Corporation
An S Corporation starts off as a C-Corp and then soon after incorporation, the owners submit Form 2553 to the IRS to be treated as a pass-through entity. Like a regular corporation, an S Corp is a collection of stockholders who share company ownership. But in this case, the income/loss of the company passes through to each shareholder’s personal tax statement.
So back to the heart of the matter: which business structure is right for you? Much will depend on how much formality you want. An LLC is great for businesses that want legal protection, but minimal formality — i.e., no exhaustive meeting minutes or addendum filings. It’s also the perfect structure for a start-up who will have foreign owners. An S Corporation is great for a small business owner who can qualify: The IRS places limits both on the number of owners and on who can be an owner of an S Corporation. A C Corporation if good for those businesses that plan to reinvest their profits back into the company or seek venture capital funding.
As for timing, since the main benefit of incorporation is liability protection, the sooner you incorporate or form an LLC, the better. There’s simply no reason to wait and potentially expose yourself to any more liability than you need to.
Which business structure did you choose for your business? Drop us a note; we’d love to hear from you!