Why Should I Incorporate?

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At InCorp, we’re often asked about the benefits of incorporating. While it’s always important to discuss your specific situation with your personal legal and tax advisers, here’s a straightforward explanation from our experts:

Most corporations formed today are small businesses, and two of the most common reasons for incorporating are liability protection and tax advantages. But why is liability and asset protection so critical? Consider this: Americans file approximately 90 million lawsuits every year—that's one lawsuit every three seconds! This means you have nearly a one in three chance of being sued annually. If you’ve worked hard to build your assets, you should know that others may try to take them, and our court system often makes it easy for them to do so.

So how can you protect what you’ve earned? Incorporating your business is a key step toward safeguarding your assets. Through a strategic alliance with legal counsel, InCorp can help design tailored “suits of armor” to protect you and your family, giving you the liability protection you need and the peace of mind you deserve.

• A corporation is considered a legal person

  As such, it is separate from its stockholders, its officers, its directors, and its employees. Should your business be named in a lawsuit,  the claimant(s) cannot attach the assets of the individual shareholder(s). The corporation limits the liability of the individual person who is associated with it to the extent of his actual investment in the company.

  If one corporation is good, are two corporations better? Many times, yes. As the litigation explosion heats up, many business people are finding that with two corporations they can separate their risks and minimize their lawsuit exposure.

• What if I have multiple locations?

  If you operate a business with multiple locations, you might want to consider separate corporations and run each location as a unique entity. This has the desirable effect of limiting the potential for loss in any one business to that one location. The other business locations would not be at risk.

• Asset Protection Weapon: Business Entities

  InCorp provides several asset protection weapons for business owners and investors. Such weapons include a Nevada "C" and "S" Corporation, Limited Liability Company, and a Family Limited Partnership. These business entities limit most creditors' claims to your "business" assets. Thus, your family's "personal" assets remain safe and secure.

• Real World Corporations and What the Textbook Says

  Most corporations formed today are small businesses. In fact, many only have one person as the sole shareholder, director, and officer. The main reasons for people to incorporate today are liability protection and tax advantages which can only be gained through the corporate entity. In this section we will look at the liability protection incorporating can offer. We'll also take a look at why many accountants, and even lawyers, give fatally flawed advice like, "don't incorporate until you're making at least $50,000 a year." Then we'll look at the myths and misconceptions such advice is founded upon. When you are through with this information you'll know why to incorporate. Plus, you'll know how to get protection and savings most people only wish for.

• Incorporating: The Key to Limited Liability and Personal Protection

  As you know, a corporation is a legal person. As a legal person it is separate from its stockholders, its officers, its directors, and its employees. This means if a corporation is sued, all it can lose is what it has. People who sue the corporation cannot attach the assets of the individual Shareholder. The corporation limits the liability of the individual person who is associated with it to the extent of his actual investment in the company.

  Let's say you set up a corporation, a legal person. Let's say you put $10,000 into that separate legal person in exchange for stock. You now own stock in the corporation and the corporation has $10,000. Now let's say the corporation you formed takes $7,000 and buys a vehicle to use in the corporate business. Let's say it takes the rest of the money and hires an employee. You tell your corporate employee to take the corporate vehicle and go run an errand. Your trusty employee goes out with the corporate vehicle and proceeds to run over someone. Now you have a problem, because the negligence of that employee will be imputed to the corporation. It almost always is, and you will probably be no exception.

  The good news is you can rest a lot easier than many people in this situation, because you had the foresight to incorporate your business. All that you have at risk is the $7,000 car and a couple of thousand dollars in cash. Not bad when you consider all of your personal assets would be on the line otherwise.

  A wrongful death lawsuit such as the one that would result in our example could easily run into millions of dollars, exceeding insurance policy limitations and coverage. A lawsuit like this would ruin most people; incorporation is needed protection. I cannot urge people strongly enough to be prepared. Prepare for the worse, and hope for the best. There are also lawsuits that come from employees to consider, such as wrongful termination, discrimination or sexual harassment.

  There are customers who could sue for service failures, loss profits, damage to reputation, slander, and more. There are suppliers who could sue, people who just walk across your yard and slip or step into a hole, can sue. The possibilities go on and on.

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• Do These Lawsuits Happen in the Real World

  According to the National Center for State Courts more than 19 million civil lawsuits were filed in the United States in 1992 alone. This trend is continuing. According to Jack Farls, President of the National Federation of Independent Businesses, in an article printed in "The Chronicle" of Centralia, Washington on May 19, 1995, "the toll of just one lawsuit can be so great that guilty or innocent, many firms shut their doors, lay-off their employees and vanish into legal graveyards." Everyone knows about the famous multi-million dollar McDonald's hot coffee suit. In the months since that jury award, dozens of similar suits have been filed against restaurant owners.

  Sexual harassment is more and more a danger faced by small businesses. This past June, Wal-Mart was on the receiving end of a $50 million sexual harassment verdict from a Jefferson City, Missouri jury.

  Still other outrageous lawsuits fill today's newspapers. According to an article in the Harrington, Texas "Valley Morning Star" from August 7, 1995, a Texas Wal-Mart store was charged with a $5.5 million jury verdict because it allegedly sold .22 caliber bullets to a 19 year old teen, who put them into a pistol that was accidentally discharged on a fishing trip.

  Even more outrageous was the case involving an Alabama physician who purchased a brand new black BMW. The physician took the BMW into a body shop to have it "gussied up" and the body shop discovered that the car had been previously painted. Since it had been slightly damaged in shipment, BMW repainted the car. The physician, doing what seems to be all the rage, sued BMW and as a result won $4,000 in compensatory damages and $4 million in punitive damages because his car had been painted twice. The examples of ridiculous and outrageous lawsuits go on and on. The fact of life today is that this trend is real and it could happen to you.

  The courts are full of real life examples of huge lawsuits. If you are unincorporated and you fire an employee, or just get one upset, you could be facing a lawsuit for wrongful termination and/or intentional infliction of emotional distress, emotional damage, breach of covenant of good faith and fair dealing, and on and on. The lawsuit could not only take business assets but personal assets of yours as well. Incorporation would limit your liability and protect you.

  It's a risky world out there in business. Incorporating doesn't eliminate lawsuits, but it cuts down on a person's deep pockets. Generally, all an incorporated business risks is what's in the corporation. The personal assets of Shareholders are not at risk, valuable protection in a litigious, dangerous world.

  Why should a business person risk all of his own assets he has spent a lifetime building up? Why should he risk his family's welfare? There's no good reason, especially when they can do a simple thing like incorporating to limit their exposure. It's such a simple, economical process and yet it's overlooked so often or put off until it's too late.

• Two Corporations for Limited Liability Protection

  If one corporation is good, are two corporations better? Many times yes. As the litigation explosion heats up, many business people are finding that with two corporations they can separate their risks and minimize their lawsuit exposure.

  Let's say you have two business locations. Put them into separate corporations and run each as a separate entity. This has the desirable effect of limiting the potential for loss in any one business location to that one location. The other business locations are not at risk. Other business people go even further. They'll set up two corporations, one corporation which conducts a certain business enterprise, and the other business which leases it a great deal of its assets. The chances of the leasing corporation being sued are slim since its main customer is the other corporation which you still own. If the lessee corporation is sued, while there are some assets at risk the bulk of the assets are owned by another company that is not subject to the suit.

  Also consider the possibility of putting different assets into different corporations to spread out the risk. For example, let's say you own multiple apartment buildings. Put each apartment building into a separate corporation, that way, if a tenant living in one apartment building sues, that suit is brought against the corporation that only owns one apartment building. Only one apartment building is at risk and the others are secure. When you consider it, this is like buying awfully cheap insurance that will protect your assets. If it sounds difficult to maintain, remember that InCorp can help you keep your entity compliant with our world class registered agent services (also known as resident agent services) and other managed reports services as required.

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• Don't Delay Your Plan!

  Whether you are a professional, small-business owner, or simply someone who has built up a nice little financial nest-egg for your retirement and children's education, you should consider taking advantage of asset protection weapons.They're all perfectly legal, and perfectly smart!

  But before you begin, one word of caution. Asset protection devices will not protect you from claims arising from your intentional acts, family support obligations, or any asset conveyance to avoid an existing known creditor. And nothing short of a nuclear holocaust will stop the IRS!

  So, build your suit of armor before trouble comes your way. And always remember, if you don't have an asset protection plan, you still have a plan; you've simply planned to allow someone to take your hard-earned assets away from you.

Remember, when you form a corporation, LLC, or other business entity, you will also more than likely need a Registered Agent. InCorp can help you keep your entity compliant with our superior Registered Agent service and other managed report services as required. Just be certain to ask one of our experts about these services and we will be happy to assist you!

If you have additional questions about the benefits of incorporating, we invite you to explore Part 2 - Assets and Lawsuits for further insights. You can also read more to deepen your understanding of the reasons and process for incorporating.

Simply contact us today to get started!