One of the most important reasons to incorporate your business or form an LLC is to protect your personal assets from the claims of your business’ creditors.
As a sole proprietor or partnership, you have “unlimited liability” to your creditors. That means that all of your personal assets are at risk to pay your company’s creditors if the business fails, is sued or is unable to pay its debts. A corporation or an LLC has “limited liability,” meaning that neither the LLC’s members nor the corporation’s stockholders are legally obligated to pay the company’s debts to its creditors. Your investment in your company is at risk, but not your remaining personal assets.
The owners of a corporation, called 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 only liable for the company’s debts if they agree in writing to assume the debts, if the company has not been managed according to Delaware law or it is guilty of fraud. In that case, creditors are permitted to hold the owners liable for the company’s debts.
The second reason many people incorporate or form a LLC is to take advantage of the tax benefits available to these types of businesses. These so called “employee benefits” may be available to your company just as they are for large public companies. Even if you are the only shareholder or owner and only employee of your business, your company may 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 if your company is eligible for these benefits.
Over one-half of all Fortune 500 companies and corporations listed on the New York and NASDAQ are incorporated in Delaware. Over 60% of new IPO’s are Delaware companies.
Delaware has a long history of being business friendly. The state has actively kept its corporate and LLC laws at the leading edge of corporate governance. Luckily, you do not need to be a Fortune 500 company to take advantage of Delaware’s business friendly laws. No matter how small your operation, registering in Delaware can benefit your business.
Remember, whenever 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 counsel or business advisor.