To Incorporate or Not to Incorporate

...that is the question.  

If you're a sole proprietor who is wondering whether it's a good idea to incorporate, read on.  99.9% of the time, I'd tell you to incorporate.  

Here's why:

Let's clear this up at the beginning: when I use the term “incorporate”, I don't necessarily mean forming a corporation.  I use the term “incorporate” to describe the process of forming some entity so you aren't operating as a sole proprietor.  There are several entity choices in Nevada – domestic corporation, limited liability company (LLC), professional limited liability company (PLLC), limited partnership, (LP), limited liability partnership (LLP), limited liability limited partnership (LLLP) and any other entities we can come up with that overuse the letter “L.”  I mostly deal with the LLC and the corporation.

For either a corporation or an LLC, you start the formation process by filing Articles of [Something] with the Secretary of State's office.  An LLC uses Articles of Organization while a corporation uses Articles of Incorporation.   Then you'll file the Initial List (Initial List of Members or Managers for an LLC and Initial List of Officers for a corporation).  You'll also need to name a Registered Agent, which is a physical address, not a PO Box, at which a human being can accept service of a lawsuit during normal business hours.  You can act as your own, hire a commercial service, or have a law firm do it.  Acting as your own registered agent doesn't mean you have to park your keester at that address Monday through Friday, 9-5; it just means someone looking to sue you needs to be able to find you.  You'll have to renew your entity every year to keep it in good standing, which involves filing an Annual List of Officers/Members and paying the associated filing fees.

After I finish explaining all of this, many people say it sounds like too much trouble.  Let me explain the benefits of incorporating.  When you operate your business using an entity like an LLC or corporation, that entity places a corporate “veil” between your business and personal assets.  Because your business is the likely target of a lawsuit, you don't want someone winning a lawsuit coming after your personal bank account to satisfy their judgment.  If you are operating your business using an entity, someone winning a lawsuit against the business can only satisfy that judgement out of business assets; they can't touch your personal assets.  The trick here is to ensure you are truly operating the business as a separate entity and you haven't signed any personal guarantees.  Contrast this with what would happen if you were sued as a sole proprietor – all of your personal assets could be used to satisfy a judgement.  

In only rare instances, and only reluctantly do I ever tell someone they are better off as a sole proprietor.  In nearly all cases, it's well worth the few hundred dollars in annual fees to maintain an entity and keep that corporate veil in place.  

So which do you form?  A corporation or an LLC?  To make this decision, you must consider the type of business you have, how you'll fund it, grow it, manage it, and ultimately get out of it.  Yes, your exit strategy comes into play this early on in the process.  

To conclude, in the vast majority of situations, it’s best to incorporate.  The question then becomes what type of entity to form and then how to manage it so that you keep that corporate veil securely in place.