The Upside of Incorporating and When

Here are just a few reasons you might want to incorporate, but the reasons can be many:

-You are going into business with someone you are not related to and there is a chance that there could be a dispute about money, obligations, job performance, etc. In this case having a corporation is strongly advised because it is important to memorialize what each person's obligations are, what each person's stake in the company is, and what are the standards of conduct of each person in the corporation.

-You eventually want to sell the business someday. Not everyone wants to eventually sell their business down the road, but most do. If you have your business incorporated, and all the legal work is squared away, and you basically have a turn-key operation to hand over, then a prospective buyer will be much more likely to give you a decent offer.

In contrast, a potential buyer may be spooked by a business that is not incorporated, the assets or intellectual property are not appropriately tendered to the corporation, there may be a myriad of unresolved legal issues, and a lack of documentation. This could be a strong sticking point for most prospective purchasers.

-You want people to take your business seriously. Now, hear me out. I know several corporations that are basically run like three ring circuses and are basically empty shells. And I know of several mom and pop sole proprietorships that aren't incorporated that pull in millions and operate with the quiet efficiency of a German Sports Car. That being said, most people will not take your business seriously if you are not actually incorporated. That's just the way it is.

However, I would not incorporate solely for this purpose alone.

-You might want to use your corporation as an Estate Planning Instrument. A lot of people don't know this, but it is possible to use a corporation as a vehicle to pass assets down to your family members and get around probate and other administrative actions. Now I am not suggesting some shady moves to get away from taxes, nor am I suggesting that you deed your residence over to the corporation as a slick move to avoid death taxes.

However, if there are several high priced assets in the business, it is a perfectly acceptable and ethical way to pass this down to your family members through a corporation. You just simply name them to be the people to take over the corporation upon your passing or disability.

-Obviously, you want to incorporate when you have a substantial amount of personal assets that could be attacked in the event of a lawsuit, but then...I'm sure you already knew that.

-You are in a marriage that you are not sure will last. Face it, stuff happens and you may have to protect yourself in the event of a divorce. A corporation can be structured in a way to specifically spell out who is the manager, who are the shareholders, and who will run it in the event certain things happen.

***Keep in mind that in this case, if you are already married, or you will soon be married, you will either have to make a "Post-Nuptial Agreement" or a prenuptial agreement. A postnuptial agreement is an agreement you make while you are still married and it will basically say that in the event of a divorce, that you are the sole owner of the business and that your spouse will not be able to get any of those profits.

Note: This case is currently being played out with the Los Angeles Dodgers. Back in 2003, when Frank McCourt purchased the Los Angeles Dodgers, he made a postnuptial agreement with his wife Jamie McCourt that said that he would be sole owner of the Los Angeles Dodgers. Fast forward 6 years later, and Frank looks like a genius. After he found out that Jamie McCourt was sleeping with her personal chauffeur, he fired her. And even though Jamie McCourt claims that the postnuptial agreement is null and void, she has been barred from managing the Dodgers (She had been President of the Los Angeles Dodgers from 2004-2009 and is now replaced by Dennis Mannion). This case is still pending, but it is expected that Frank McCourt will be named sole owner of the Los Angeles Dodgers by virtue of the postnuptial agreement.