“As far as I am concerned, nothing is worth going broke for.” Warren Avis, Avis Car Rentals Dear Dr. Adams, my wife and I are about to open a home based business. I have been reading that the easiest way to get started is a proprietorship as it can be expensive to incorporate; besides we will have no employees. But my neighbor, a high school business teacher says we should incorporate. What do you think? Andy Dear Andy, Incorporate! In my opinion, it is one of the few business topics that are not debatable. To use any other form of ownership is foolhardy and places your personal possessions at risk. You will find that starting is new business is risky at best, so why throw the lifejackets overboard? Perhaps you are not aware that the idea of creating corporations as a way to protect investors and speculators was born during the early stages of our industrial revolution to induce the wealthy of the day to invest in risky business ventures. Understandably, the Lords and Ladies of the day were hesitant to gamble with the family silver and place the castle at risk as well. So, the lawmakers with a little urging from the business lobbyists of the time created the concept of limited liability. It was a stroke of promotional genius. For the first time in economic history if you invest in a business venture that is a corporation you only risk your investment- what ever else you own is untouchable. Limited liability created the fuel to start our industrial revolution. It was the incentive to risk a pile of pounds in hopes of getting handsome rewards-but if the venture went sour-the Sheriff of Nottingham could not grab your country estate to pay the debts of the failed adventure. Yes, if you are starting a home based business and have no employees, the easy way to start off is file the name of your biz and that is it. You and your business are one- your income and expenses are mixed together. Establishing a proprietorship is simple, but foolish. Suppose your new business does not make it and your debts to suppliers and others go up like a hot air balloon- what do you do? When they press you for money –with your back to the wall- as they say, you give them the bad news you are broke. Now you would think they would understand your plight and say “sorry to hear that” but no, they are not satisfied, they want your castle and carriage. And the Sheriff of Nottingham will help them get it. So, while it may by the easiest way to get into business it is the most risky as you place all your assets in harm’s way. The courts make no distinction between your business and your personal possessions As to partnerships, there is even more risk. The creditors are free to go after the partner with the deepest pockets. And should you have the bad luck of a rogue partner, his or her actions, honest or dishonest, will place all you have at risk. Each partner can obligate the other. You will need more than sleeping pills to get through the nights. How do you incorporate? Begin by seeing an attorney; the usual fees are around $500. Your lawyer will file your business name with the Secretary of State of the state you are incorporating in as well as file with the IRS for a tax identification number. As soon as the name of your business is approved, he or she will order your stock certificates and your corporate seal. The seal is required by your bank to open bank accounts in the business name. The process takes about a month. So it is no big deal. How you issue the shares of stock is your call, but your attorney will help you with the details. Is it foolproof to protect your personal assets- no! If you owe taxes, our federal government can drive right through shield of incorporation and grab the family farm. So pay your taxes before anyone. And you surrender your protection if you borrow money or ask for credit from a supplier and you sign a personal guarantee. Do so only as a last resort. Ask your attorney about other circumstance where a corporation may not protect your assets. So Andy, forget what your neighbor said and call your attorney. You will sleep better. Copyright 2004 Dr. Paul E Adams, Professor Emeritus Business Administration Ramapo College of New Jersey Author “ Fail Proof Your Business: Beat the Odds and be Successful.” Available Amazon.Com. If you have questions or comments- contact me: drfailproof@earthlink.net