How to legally protect your small business
The main reason businesses should incorporate is for liability protection, according to Nelli Akalp, CEO and founder of Corpnet.com, an online legal document filing service. "A lot of business think they're too small, but incorporating or forming an LLC is always a good idea," and she adds that tax savings, added credibility, establishing business credit and helping to raise capital as other benefits.
Akalp says that the incorporation process has been greatly simplified and that a sole proprietorship is the simplest form, where a small business owner wants to do business under a fake business name or under their own name, using "dba." She notes that without the protection of a corporate shield, your personal assets are being exposed to liability and a judgement against a small business owner can last for up to 22 years.
The options for small business owners are whether to form an LLC, C-Corp or S-Corp. With an LLC, or Limited Liability Corporation, you get the best of both worlds, Akalp says. You get liability protection but minimal formalities and is perfect for foreign owners. Akalp does not recommend a C-Corp for small business owners because it intends to raise capital through investors or issue stock. An S-Corp is also great for small business owners who can qualify. Akalp says that certain qualifications have to be met by the shareholders and it's also great for owners who want to receive the benefits of self-employment and be an employee of the corporation.
For businesses with less than five shareholders, Akalp recommends incorporating the business where it has a physical presence. There are several ways of going through the incorporation process, by hiring an attorney, filling out the paperwork yourself or choosing a reputable online filing service, such as Corpnet.com.