Choose the right form of business entity. You need an entity that will
limit your personal exposure. Usually the corporation or limited liability
company (LLC) will best protect your personal assets from the debts and
liabilities of the business. Still, many people venture into business
without corporate or LLC protection and operate their venture as proprietorships
or general partnerships. That’s foolish. Why do these people needlessly
gamble their personal assets on the success of their enterprise? Since
most small companies fail, this is a very poor gamble. Nevertheless, millions
of small American businesses are still unincorporated.
Why is this? One answer is that small business owners are often unsophisticated
about business and legal matters. They don’t always appreciate the
importance of a corporation or LLC for their personal protection. And
their attorneys also may overlook the hazards of business and fail to
incorporate them. We also see accountants who are often more concerned
about the added paperwork from incorporating than liability protection.
They too discourage incorporating. However, incorporating your business is your
best insurance. Only a corporation, LLC or similar limited liability business
organization limits your potential losses to your investment in your business.
If you operate your business as a sole proprietorship or general partnership,
you and your business are considered one and the same. But why allow business
creditors to claim your personal assets? If you want to protect your personal
assets, set up a corporation, LLC or another protective entity to operate
your business or professional practice. That’s Cardinal Rule #1.