In the United States there are approximately 28 million business owners and each month an estimated 500,000 new entrepreneurs start new enterprises across the US. Each business owner at some point must deal with the question should you incorporate your business or not? Let’s look at the facts behind whether you should incorporate your business or just run it as a sole proprietorship.
If you run your business as a sole proprietorship then you will simply file your business tax return with your personal tax return on your schedule C in most cases, you will also not necessarily need to get a separate Tax ID (Entity Identification Number) for your new business.
As a sole proprietorship you will also automatically take on any liability that the business is issued, this could be from a judgment that is ruled by a court of law that holds you and your business responsible and liable for any mishaps that occur with your business.
For example, if you were selling lemonade and the lemonade had some hazards that led to health issues for its customers then theoretically you could be found liable personally for your business and need to pay for any health bills and other medical liabilities that are brought about due to the actions of your business. Wow, that sounds like a lot of liability that may not exactly be the position that you want to find yourself in as a new business owner.
The other option is to incorporate your business which in the US means that you will set up some sort of limited liability corporation/partnership (LLC), S Corporation or C Corporation. Each of these entity types has certain pros and cons that come with each, for many business owners the advent of the LLC has been extremely popular due to the fact that as stated in the definition of the entity type, the LLC can actually limit the liability of the business owner.
Centuries ago, if a business was found liable for a myriad of issues, the result could be that the business owner could go to jail if unable to pay the judgment and his family might be sold as servants to repay the judgment or debt. Back in the mid 1800’s a new entity type was created by the US which is what we now know as the limited liability it limited the liability of the business owner and made it more practical to start a business with less risks.
Today it makes just as much sense as it did back then to incorporate your business and so if you wish to limit your liability then incorporate your business.