Advantages of Incorporating: Perpetual Existence and Personal Asset Protection
Deciding to start a business is a big decision. When you finally do make that decision, you want your business to be successful and to be around for a long time. You may even want to pass your business down from one generation to the next. If you incorporate your entity by forming a corporation or limited liability company (LLC), you create perpetual existence for your business and can protect your personal assets.
What exactly is perpetual existence? It means that when your business is incorporated, it has no expiration date. Your entity will exist for an unlimited period of time, unless you designate for your business to have an end date. With sole proprietorships and partnerships, the business ends when the owners die or leave the business. With corporations and LLCs, businesses continue to exist even if ownership or management changes.
How can incorporating your business protect your personal assets? Both corporations and LLCs allow owners to separate personal assets from business assets. If a business is properly structured and managed, owners should have limited liability for business debts and obligations. Limited liability refers to the protection given to corporate shareholders, limited partners or members of the Limited Liability Company if a judgment against the business is made.
Here is an example of personal assets at risk. Let’s pretend that Ellen sells skin care products through a party plan company. Ellen works as an independent contractor and, therefore, is sole proprietor because she has not incorporated. A customer that used the skin care products has a bad skin reaction to them decides to sue Ellen. Since Ellen did not separate her personal assets from her business assets, Ellen may be in jeopardy of losing her personal assets like her car, house and life savings. By setting up a business entity like a corporation or LLC, Ellen could have separated her personal assets from her business.