What is the first defensive step to take when you go into business?

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.