Like most things, planning ahead can avoid problems. Although no one who operates a business anticipates being sued, the simple fact is that businesses are sued all the time. (Whether the lawsuit is meritorious or not is a topic for a different article).

If you are operating your business either as a sole proprietorship or as a partnership, you might think that it is the business that would be named as the defendant in a lawsuit against the business. But this is only partially correct. In fact, the named defendant would be you individually (and your partner(s) individually) and doing business as, for example, ABC Widgets (whatever the business is named). If judgment is later entered in the lawsuit, the judgment would therefore be entered against you (and your partners) individually, which means that your personal assets (e.g., house, bank accounts, etc.) would be at risk.

If you incorporate your business, however, you can avoid this “nightmare” scenario in which your personal assets would otherwise be at risk. Any judgment entered against the business would be enforceable against the business assets instead of your personal assets. In this sense, incorporating your business is similar to purchasing an insurance policy insuring your personal assets (although you should still maintain insurance policies on your personal assets as you otherwise would).

Another significant benefit that oftentimes results from incorporating is that the business pays less in taxes (e.g., is placed in a lower tax bracket). These tax savings assist to offset (either entirely or partially) the relatively minor cost of incorporating, as well as the cost of maintaining the corporation (e.g., CPA charges).

For these reasons, incorporating your business is usually a win-win when guided by the sage advice of an experienced attorney and an experienced CPA.