Incorporating Your CompanyAgitated that the NBA is now prohibiting him from using Stickum during games (even though he’s been doing so for years), Dwight Howard wants to find a permissible product that he can use to grip the basketball.  Dwight thinks it could take the basketball world—not just the NBA—by storm.  Keeping all of this from the NBA, he convinces his teammate James Harden to go into business with him.  James wants to make sure that his agreement with Dwight on the business venture is air-tight and wonders if they should set up a corporation or limited liability company to protect themselves now and in the future.  Is James’ thinking an easy lay-up?

Here are five reasons why incorporating your business may be the right choice for you:

  1. Protecting Your Personal Assets: The debts of a corporation or limited liability company belong to the entity, and not to you personally (unless you personally guaranteed those debts).  Incorporating your business will typically protect your personal assets if your business can’t pay its bills—but you have to make sure you follow the appropriate corporate formalities.
  2. Potential Tax Advantages: Depending on what type of entity you set up, the income the entity earns may be taxed at a lower rate than your personal income tax.
  3. Bringing on Investors: You’ve got an opportunity to expand your business, but you don’t want to borrow money from a bank.  Having a corporation or limited liability company will let you bring investors into the mix—something you can’t do as a sole proprietor.
  4. Limiting the Potential for Litigation with other Founders: If you and a co-worker want to start a new business together, setting up a corporation will also mean that you’ll have a written company agreement that addresses issues such as the ownership split and how management decisions are made. This reduces the likelihood of the two of you being stuck in a “he said, he said” dispute later on about your agreement.
  5. Increase your Credibility: The public tends to feel more confident dealing with a corporation than with a sole proprietor. Being able to put “Inc.” at the end of your business’s name makes it look more professional and credible to potential customers.

Tilting the Scales in Your Favor.

When it comes to incorporating your business there’s no “one-size fits all” approach.  Whether incorporating is right for you depends on your individual circumstances, and you should consult with a lawyer and your tax advisor before making your decision.  If you do decide to incorporate, there are a few more issues to consider:

  • Insurance: Your homeowner’s policy may not cover your business, even if you only work out of your home.  Talk to your insurance agent and make sure you have the right policies for your needs.
  • Trusts: While incorporating will typically protect your personal assets from creditors of your business, you can add additional layers of protection with trusts to protect your most valuable personal assets.
  • Employee Issues: Regardless of whether you incorporate or not, if you have employees, you need an employee handbook that clearly sets forth company policies.  And, depending on the type of employee you hire—such as a sales person—you may want to consider having a non-competition agreement with your employee.  My partner Michael Kelsheimer offers a free “Employer Handbook” with easy to understand Texas-specific answers to frequent employment questions.
  • Contracts: If you have form customer contracts and you incorporate, they will need to be changed.  Get a contract checkup, because an attorney should also explain to you how the contract needs to be signed in order to protect you from being personally liable.