This article originally appeared as a column for the Cleveland Jewish News.
Perhaps you have heard of terms like “S-Corporation,” “C-Corporation,” “limited liability company,” and “limited partnership.” This is by no means an exhaustive list, but these are examples of some the various types of separate entities under which your business can be organized. An attorney – or perhaps a comprehensive internet search – can educate you about the various types of entities available and help you decide which is best for your business. Or, if you are interested, you can go straight to the source in Title 17 of the Ohio Revised Code, which sets out the general laws regarding the types of entities available to Ohio business owners. But, before you get to the question of what type of entity you want to consider, you will want to determine whether you want to form a separate entity at all.
Drawbacks to incorporation are few, but there are some. The secretary of state of the state in which you are filing will have a fee schedule. While generally pretty reasonable, it is an additional expense. Taxes will be filed separately from your individual returns, as your business will exist as a separate entity with its own identification number, meaning more paperwork and accounting costs. Finances should remain separate, and you will want to establish separate bank accounts from which you pay business expenses versus personal expenses; and, caution is necessary when characterizing an expense as “business” or “personal.” And, of course, if you will ultimately be looking for funding sources, you will likely lose some ownership and control over the entity as a result (for example, by selling shares in exchange for venture capital funds.)
That said, most small business owners find that the benefits outweigh the drawbacks. Liability is one of the primary reasons business owners choose to incorporate. Let’s say your customer wants to sue for damages stemming from his or her use of a widget that you invented, or someone slipped and fell in your store, or maybe their roof leaked after you repaired it. Your existing insurance coverage may or may not be sufficient to cover damages and any resulting attorney fees – or perhaps coverage is denied altogether – and plaintiffs’ lawyers will be looking to collect however possible. If your business exists as an entity separate and apart from you, your business assets will be at risk, but your personal assets will be protected from the lawsuit. Otherwise, you could be stuck holding the bag when the customer’s property was damaged, or worse, a person was injured.
Incorporation has other financial benefits, as well. You will likely find that you have increased tax flexibility and benefits, and more favorable deduction rules. You also may have some flexibility as to the state in which you organize. Delaware, for example, is generally considered to have very favorable corporate laws, and you may be able to organize in one state while being physically situated in a different one. Your business will likely be considered more credit-worthy than you are as an individual, making it easier to obtain the money you need to grow your business. Finally, your own estate planning becomes easier because a business can exist in perpetuity, making it easier to pass your legacy down to your heirs.
The question of whether or not to organize your business as a separate entity is vitally important to its growth and continued health, and should be part of your business plan from the start. It simply makes good financial sense, not only to protect your business interests, but also to protect yourself and your livelihood.
*Andrew Zashin writes about law for the Cleveland Jewish News. He is a co-managing partner with Zashin & Rich, with offices in Cleveland and Columbus.