Jennifer Mahe: Is there an advantage to incorporating my new business?
Starting a new business is exciting and often overwhelming, as nearly anyone who has done it can tell you. There are many new tasks to undertake and lots of new information to process. The goal in addressing all of the issues that arise in undertaking this exciting new challenge is to find the best solution for your business to succeed. Invariably, among these issues, either the entrepreneurs themselves or someone else will ask, “Should you incorporate?”
As an initial point, it’s worth noting there’s no legal requirement all businesses be incorporated in the state of Nevada. There are a variety of requirements regarding obtaining business licenses, which all business must fulfill; however, businesses can function as individual business owners themselves — for example, a plumber doing business utilizing simply his or her name, or as a partnership, for example, a group of doctors operating a medical practice utilizing their names or under a fictitious firm name. While choosing not to incorporate is certainly legal and may benefit your individual business model, an informed decision requires an understanding of the potential advantages and disadvantages of incorporating.
There are several advantages which can be realized by incorporating your business. The primary advantage to incorporation is a business entity may shield the business owner from some types of liability, commonly contractual liability, if all statutory requirements for the entity are followed. Specifically, if the business entity enters into contracts with vendors or customers in the name of the business entity, then the entity, not the individual business owner, would be liable in the event the contract was not fulfilled.
Essentially, business owners may be able to shield their personal assets, e.g., their home or personal bank accounts, from being exposed to debts or liabilities incurred in the course of doing business.
Another advantage to incorporation is an incorporated entity has an unlimited term. This means an entity has the potential to “live” indefinitely, unlike the individual business owner. Accordingly, the business owner has the option of simply transferring the owner’s interest in the entity at a sale or upon the owner’s death, hopefully with minimal, if any, interruption to the business.
Finally, formation of a business entity may result in tax advantages depending upon a variety of variables. When considering whether incorporation is appropriate or beneficial, it’s important to discuss the incorporation issue with your accountant.
Though there are undeniable benefits which can be realized by incorporating, there are some disadvantages as well. Incorporation requires the submittal of forms to the Nevada Secretary of State, both to initially incorporate and, thereafter, on an annual basis. Such forms, as one might expect, require filing fees. The fees vary for the initial formation, often being several hundred dollars, and the annual fee thereafter is also several hundred dollars. Furthermore, in order to obtain any true advantage from incorporating, it’s essential the individuals responsible for the business understand the statutory requirements for their business, such as notice and meeting requirements, and that such requirements are followed. If the legal requirements are not complied with, an individual runs the risk of losing any potential liability protection the entity may have provided.
Depending upon the type of business and the individuals involved, incorporating may be an important step in starting your business, or it may be something which can be undertaken later or never.
Jennifer Mahe has practiced law in the Northern Nevada area since 2005 focusing on general civil matters such as real estate, business, litigation and estate planning. She can be reached either via the Mahe Law, Ltd. website, http://www.mahelaw.com, or at 775-461-0992. If you have a legal topic related to general civil law which you would like to see addressed in this column in the future, please send that topic to the Nevada Appeal.