During the past few weeks, we discussed bad entities – now we will begin to look at your good entity options, beginning with the corporation.
All good entities are the ones that limit your liability and offer asset protection. Corporations, first chartered by the English Crown in the 1500’s, are the oldest good entities.
When you set up a corporation, you are creating a new legal person. Upon being chartered by the state, a corporation establishes its own legal identity. No matter how passionate you feel about your business, no matter how personal it is to you, you are not your corporation. This separation offers a big benefit. Because a corporation has its own legal presence and its own tax identity with the IRS, the corporation acts as a shield for the owners, whose liability is limited to the money they invested to start the corporation. If the corporation is sued, it is the corporation itself, as a separate legal entity, that is sued, not the owners, whose personal assets are not part of the company and are protected by the corporate veil. (Unless you sign a separate Personal Guarantee agreeing to be personally responsible for the debt if your entity doesn’t pay it.) And because the corporation is its own separate legal entity the death of a shareholder doesn’t mean death of the corporation.
For more information on choosing a good entity, read chapter one of Run Your Own Corporation.