INC or LLC - Which is best for YOUR small biz?

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oration and later a LLC (LLC?s are a fairly recent creation) were cost prohibitive for many small business people because of excessive state and attorney?s fees. Consequently, many small businesses remained as sole proprietorships or partnerships until it made financial sense to form an entity. State fees have come down significantly in most states and incorporation services, like this one, and other competition have lowered the cost of filing an entity.

Now, most small businesses should be either a LLC or corporation! Whether you are just starting your business or you?ve been in business for a while, there are simply too many reasons not to form an entity. The two biggest reasons are limiting your personal liability for business debts and judgments and federal (and sometimes state) income tax savings.

Probably the best reason for forming either an INC or LLC for your business is to protect your personal assets from business liability. Generally, your business liability is limited to the assets that are owned by the INC or LLC. This means that your personal assets (i.e. home, auto, retirement accounts, etc.) potentially aren?t at risk because of your business debts or liabilities.

Notice, I said ?potentially.? Just because you operate your business as an INC or LLC doesn?t mean that there is no way a creditor can go after your personal assets as an owner (or representative) of that INC or LLC. If you personally sign for a bank loan, on behalf of your business, and your business cannot pay, you become personally liable for that loan. If you cannot pay, then the bank can go after your personal assets. Likewise, if you act negligently as a representative of your business, you may be personally liable for a lawsuit (in addition to your business) due to your negligence. Just think of those officers and directors of Enron or Worldcom that are being sued for negligence.

Additionally, lawyers will sometimes attempt to ?pierce the veil? of protection of the INC or LLC and go after the owners personally in a lawsuit. This can easily happen if you fail to pay your state?s annual report fees or franchise taxes. This can also happen if you fail to maintain your corporation?s organizational paperwork (i.e. minutes, bylaws, etc.).

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