When people go into business, they want to ensure that the assets that they worked so hard to build are protected in case something goes wrong. For example, if the business gets sued, the business owner wants to ensure that their assets, such as their house, their cars, and their bank and investment accounts are protected.
One way to protect your personal assets are to form a business entity to shield your personal assets from any business liabilities. Business entities include LLCs and corporations and are both considered separate legal persons. That means, if your business gets sued, only your business assets are at stake, not your personal assets.
You may want to consider a corporation over a LLC if you are planning to raise money by selling ownership interests in your company. For example, most high-growth startups prefer to structure themselves as corporations because it is easier to raise money and is often preferred by professional investors.
Other reasons for forming a corporation are similar to those for forming a LLC. This includes protecting your personal assets if your business gets sued. Thus, in deciding whether to form a corporation, you should analyze the amount of exposure your company has.
For example, if you started your business, but don’t have customers and aren’t interacting with the public, it may be premature to form a corporation. In California, once you incorporate, you are responsible for a $800 per year annual minimum franchise tax and if you haven’t started running your business, you want to avoid that. However, if you do have customers, interact with the public, are in a business where you have a high likelihood of being sued, have business partners or employees, then you may want to consider forming a business entity, such as a corporation.
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This article is provided for informational purposes only and should not be construed as legal advice. Read our disclaimer here.