Incorporating – Why It Is Important In A Nutshell

The idea of incorporating might invite a headache on your part. Don’t let it. While it might not be the most interesting of subjects, it is a vital move for just about every business. Why? Liability.



There are two business entities that are best for most businesses when it comes to the issue of liability – the corporation and the limited liability company. For the purposes of this article, I am just going to refer to them as a corporation so that my fingers don’t cramp up, lock up or just fall off.



These business entities are incredibly valuable because they offer a "shield" of protection that stands between you and the debts and liabilities of the business. I am sure you have the greatest idea ever for your business, but the sad truth is most businesses don’t make it longer than two years. If things start to degrade or you have a one off lawsuit for a load of money, creditors are going to come looking for spoils like Ghengis Khan storming a city looking for treasure. Okay, he didn’t go for treasure, but you get the idea.



Let’s consider the importance of incorporating by looking at an example. Let’s assume you make a smart phone accessory that is about an inch by a half an inch in size. Let’s assume they take off like hotcakes. After a year, you are doing really well and all seems well. Then you are served with a lawsuit. It turns out someone’s kid stuck the device in their mouth, chocked on it and, well, you are going to be on CNN soon.



In such a situation, the potential for a large verdict against your business is significant. Guess who is going to pay it. The first party will be the business, but if the business doesn’t have sufficient assets, the next party in line will be you. That means the liquidation of your investments, home, bank accounts, vehicles and so on. You will also undoubtedly end up in bankruptcy court with all that entails.



Now let’s take the same situation, but assume you incorporated. The multimillion dollar verdict comes down against the company. What happens next? The plaintiff’s attorney starts liquidating the assets of the corporation. When they don’t satisfy the verdict, the attorney looks to you personally but will be unable to recover because the corporation acts as a shield. Yes, you’ve lost the business, but you can always start another one again in the future. The key is you didn’t lose your personal assets and end up out on the street.



This is why you incorporate your business.



Richard A. Chapo is an incorporation lawyer with SanDiegoBusinessLawFirm.com.