Once you decide to start a business, one of the first decisions you’ll need to make is how your business will operate. You could just start selling your products or services without taking any additional steps. If you have something to sell, there aren’t many rules that keep you from just setting up shop.
Yep, that’s right. You can hang your shingle basically whenever you want.
<There are exceptions to this rule–for example: your state may have some license requirements depending on what you’re selling. Or, your neighborhood or city may have some restrictions on what kind of business you can operate out of your home>
Going the #ridingdirty route isn’t necessarily terrible, particularly if whatever you’re doing is low-risk and you aren’t sure how long you’ll continue.
BUT, most people should formalize their business with some kind of incorporation or registration.
**The term “incorporate” typically refers to creating a corporation, while “registration” refers to creating an LLC. For more on the difference between the two, check out my conversation with lawyer and professor Carliss Chatman.
The terms “incorporation” and “registration” simply mean that:
- You filed an application, which gives a state notice that you want to create a company.
- The state reviewed that application and, if you met all the requirements, it officially registered your business in its database.
Here are three reasons why I think you should incorporate or register your business.
#1 It makes you legit.
If you want to be taken seriously as an entrepreneur by your clients, customers, and any other third parties (banks, investors, etc.), incorporation/registration helps. People view these businesses as more stable, more legitimate, and more trustworthy. Being able to use that LLC, Inc, Incorporated, etc. after the name of your business gives you street cred.
#2 It ensures your business can continue without you.
If you don’t formalize your business, what happens when you die? Or what happens if you get hit by a bus and end up in a coma for several months or years? If your company is literally you, without a separate formal structure around it, it dies when you die. An incorporated/registered business can continue no matter what happens to you.
#3 It protects your personal information and your assets.
A company that hasn’t been incorporated/registered isn’t doing you any real favors. If you have to sign contracts, or apply for any kind of registrations, or participate in any other number of business activities, you’ll probably have to share your personal information–including things like your social security number (an incorporated/registered business can have its own tax ID number) or your home address (an incorporated/registered business can have its own PO Box or separate address).
Formalizing the business, and taking the few additional steps of establishing separate identifying information for it, gives you anonymity and protects your personal information.
This can also protect your assets–things like your home, your car, and the money in your personal bank accounts. Formalizing your business is the single. best. way. to protect your stuff.
An incorporated/registered business has its own legal identity separate from yours. It incurs its own debts and liabilities. As Mitt Romney once said, “corporations are people, my friend” (he gave a horrible delivery and explanation, but he was basically *right* on the legal point).
Typically, if a business ends up in a lawsuit or being held responsible for some kind of activity, only the assets of that business, and not the personal assets of the business owner or shareholders, can pay the debt/liability. This essentially means that, as long as you’re careful to follow the rules, you can do business and take on the risks of doing business without worrying that you could lose your house and personal money if things go south.
Final thoughts
There are other benefits that I don’t touch on here, including taxes, deductions and raising capital. These things are complex and involve complicated tax and finance laws and regulations. For specifics, you should speak with a professional.
In general, however, if you’re planning to start and grow a business, it makes sense to incorporate/register. I created a database with a list of all of the state offices where you can learn more about how to do this in the U.S.
Have you formally incorporated/registered your business? Confused about when/where/how to do it? Drop a comment with your questions or experiences!