by Samuel K. Darling, Business Law Attorney in Everett
[Enhanced Video Transcript Below]:
Today’s topic is “Why Incorporate?” Put a bit more accurately, the topic is “Why Form a Limited Liability Entity?” There are many such entities to choose from. You could form an LLC (limited liability company), or a corporation, or a limited liability partnership, or limited partnership—lots of options. Their commonality is the “entity shield” they create for their owners’ assets. This shield prevents a business’s creditors and claimants from pursuing the owners’ assets for the business’s wrongdoing. That means a person suing the business usually cannot collect from any of the owners’ personal assets, such as the owners’ homes, personal bank accounts, private vehicles, and retirement accounts. If you want to protect your personal assets, you should only conduct business through a limited liability entity.
There are actually three main reasons to form a limited liability entity, or incorporate; and I’ll go through each of them in this video.
We already touched upon the first reason for incorporating. That would be the entity shield, also sometimes called a liability shield or corporate veil.
The second reason to incorporate is the appearance it creates. Well-run businesses tend to be limited liability entities of some sort. As a byproduct, incorporating makes your business look more professional. It looks more professional in the eyes of your patrons, clients, or customers. It looks more professional in the eyes of banks or anyone else who might lend you money. And it looks more professional in the eyes of people who might buy into your business, whether a potential co-owner or perhaps somebody who might want to buy the entirety of your business.
The third reason you might want to incorporate: it makes your business less of a target for lawsuits. A plaintiff’s attorney will usually investigate potential defendants to determine whether the defendants are worth suing. The less money the defendants have, the less likely the plaintiff’s attorney will agree to file the suit. A limited liability structure decreases the likelihood of being sued because it reduces the available assets.
Let’s now look at some of the business entity structures available. Not all business entities are created equally with respect to liability shields. Sole proprietorships and partnerships provide no entity shield whatsoever. LLCs (limited liability companies) and corporations provide the best entity protection. And LLPs (limited liability partnerships) and LPs (limited partnerships) provide some entity protection, but not as much. Notably, an LP affords no entity protection to owners who operate the business. So LPs tend to be a poor choice in entity type, though they can be the best in at least one situation.
In this video, we are not going to fully discuss which entity type is best. It’s a large topic that depends upon your business’s purpose and goals. For more information on that and related topics, we invite you to explore our website. Our website’s resources tab will take you to numerous legal guides and videos, and our practice areas tab will lead you to our firm’s business law sub-domain.