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The primary reason people incorporate their business or form an LLC is to protect their personal assets from the claims of the business' creditors.
A corporation or an LLC by their very nature, has "limited liability".
That means that the owners of the company are not
legally obligated to pay the company's debts to its
creditors. As a sole proprietor or partnership, you have "unlimited liability" to your creditors and, therefore, all of your personal assets are at risk if the business fails, is sued or is unable to pay its debts.
The owners of a corporation, called the shareholders, or owners of a limited liability company, called members, are protected from creditor claims by the "limited liability" nature of the corporation or LLC. Shareholders and members are not liable for the company's debts unless either they agree to assume the debts in writing or the company has not been managed properly or is guilty of fraud. In that case creditors are permitted to "pierce the corporate
veil" and hold the owners liable for the company's debts. Remember, when ever a corporation or LLC does business in a state other than the state in which it was formed, it may need to qualify to do business in that second state before it can transact business. You may also need a state or local business license. You should discuss these issues with your Accountant, legal council or business advisor.
The second reason many people incorporate or form a LLC is to take advantage of the tax benefits available to corporations and LLC's. These so called "employee benefits" may be available to your company. Even though you may be the only shareholder or owner and only employee of your business, your company may still be able to deduct the full cost of health insurance, life insurance, medical insurance and other traditional employee benefits. Your company may even be able to adopt a pension and profit sharing plan. You should discuss these matters with your tax advisor to determine whether your company may take advantage of these benefits.
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