Formation: Why Do I Need to Incorporate My Business?
One of the first steps in starting a business is to choose the best type of legal entity. There is no legal requirement to incorporate your business. An individual can operate a business as a sole proprietorship and a group of individuals can operate a business as a partnership. A sole proprietorship or a partnership can even operate under a separate business name by registering a DBA in their local jurisdiction or by designating a name for their general partnership. Nevertheless, conducting business as a sole proprietorship or general partnership is generally not advisable.
The primary reason to form a legal entity is to avoid personal responsibility for the business’ liabilities. Generally speaking, only the business assets of a legal entity are available to creditors and the individual owners’ assets are not at risk. It is still critical to make sure you adhere to corporate formalities maintain adequate capitalization and insurance to avoid “piercing of the corporate veil”.
A second and often overlooked reason to form a legal entity is that it lends credibility to your business. It can be very difficult to attract investors, qualified employees, lenders, suppliers, manufacturers and even consumers to work with unincorporated businesses.
In most states, the state filing fee to form a corporation or LLC is $500 or less. Costs increase if you are forming the entity out of state and need a registered agent or if significant legal or accounting fees are required to address more complex situations.