Why Incorporate Your Business?

If you're like many small business owners, right now you're operating as a sole proprietorship. That's probably not because you've chosen to, but because you've never considered your business as being large or sophisticated enough to need to incorporate in any one of the forms readily available to you – or maybe you've never thought about it at all. If you're lucky, you'll never have to pay the price for putting off that crucial next step… but that's a very dangerous “if.”

Sole Proprietors Are Rolling The Dice

Anyone who operates a business, alone or with others, may incorporate. Under the right circumstances, the owner of any size business can benefit.

In today's competitive and unfortunately litigious business climate, you can't afford to throw the dice with your most valuable asset. Your exposure is greater than you may think, both personally and professionally.

This is by far the biggest reason to incorporate or form an LLC. It makes no sense to be a sole proprietorship unless you have no assets or future assets coming. Unfortunately many CPAs advise their clients not to incorporate until they reach a certain profit level. Overall we strongly disagree with this advice because getting sued is so very costly, regardless of whether they win or lose the case. If you are sued as a sole proprietorship, you could lose your personal assets. How?

As a sole proprietor, you personally have unlimited liability if your business is sued.

Insurance Isn't A Fool-Proof Safety Net

Some people consider insurance to be the solution. Insurance will provide some level of protection, but worst case, that protection may be only as good as the legal representation you can afford. True, you can get Errors and Omissions (or “E&O), business liability, and even officers' and directors' insurance, and a good policy should provide some protection. But NONE of those will help you with protecting the corporate veil. In fact, there is NO insurance policy in existence that can do that.

If you have an insurance claim of $10,000 your insurance company will usually pay it. However, if you have a claim for $900,000, you can expect a visit from your insurance company's attorney. Why? To find a loophole in your policy so they don't have to cover you. And of course, even if they do cover you, your rates will skyrocket – if your policy isn't cancelled!

Consider these insurance statistics:

• In 1999, 40 insurance companies defaulted and are now out of business.

• By the year 2000, 56 more companies defaulted.

• In fact, according to Standard & Poor, 456 insurers are now considered “ at risk .” Could one of them be yours?

Even those that have stayed in business…

• Have been forced to raise their rates dramatically.

• Other industries such as the construction industry are seeing liability increases from a low of 15% to a high of 100% in a single year. (Source: McGraw Hill)

• In one case, a group home saw their insurance increase from $3,500 to an incredible $35,000 in a single year .

What would that rate hike do to your company?

And here's another problem. If you haven't recently applied for a home loan, a second, or financing for a car, you may not be aware of how times have changed. Five years ago, financial forms asked a very important question: “Do you have any judgments against you?” That meant, “Have you been sued, lost the suit, and had a judgment levied against you?”

But financial institutions have gotten smarter. They now use a very formalized system to rate levels of risk for loan applicants. One result of that system is that loan application forms today ask a very different question: “Are you currently involved in a lawsuit?” That means that anyone can try to sue you, for any reason – frivolous or not – and if you're in the middle of applying for a new home or car loan you're rated as a much higher risk. And that translates to a lot of money out of your pocket!

Are you willing to forego that dream home, that new car, because of some irresponsible, irrelevant lawsuit? You may not even be able to lease office space. Imagine what that could do to your business.