The 4 Best Reasons to Create a Separate Entity

If you are a sole proprietor, do you need to create a separate entity ( LLC / Corporation ) for your business? 

We highly recommend creating a separate entity for your business regardless if you are the only owner.

A separate entity can provide you:

• Liability Protection - The owners and managers / directors of an LLC or corporation are not personally liable for certain company debts and liabilities, such as:
  1. acts of your employees that weren't your fault;
  2. acts of the other owners, managers, and directors. There are certain exceptions, but this liability protection generally means that your personal assets (your life savings, property, etc.) are not in jeopardy in the event of a debt or other liability of the LLC or corporation. 
  3. company loans and credit cards (unless personally guaranteed);

• Deal Certainty - Partners are formed with a deal where you negotiate on two things terms and price. Terms can includes who has authority in the business and what that authority covers, IP etc. Price dictates what among you are putting towards the business, what cut you receive, and / or ownership. All the owners and managers of your business will know what their terms and ownership for their business with these documents:
  • A LLC typically uses an Operating Agreement
  • A Corporation uses Bylaws

• Legitimacy - People perceive a separate entity such as an LLC or corporation as a more legitimate business than a sole proprietorship. It displays that you take your business seriously and have taken the right steps to protect yourself and your company.
• Potential Tax Benefits - Establishing a well-structured business can also result in significant savings on self-employment taxes and other business / income taxes. It makes is much easier to separate your deductible business expenses from your non-deductible personal expenses.  Everyone's situation is unique, consult your CPA!

When is a good time to form a separate entity?

• If you work alone and are the only owner –  you may have a great business plan or just want to start your business immediately. Your separate entity isn't required immediately. We strongly recommend to form a new entity as soon as possible before doing business with others. That means when you are trading goods or services for compensation.

• If you have business partners – Immediately. It is important to establish your new business in place so that everyone involved is clear on their ownership and management responsibilities. This will reduce arguments down the road resulting to disagreements on ownership and what was once agreed upon.