As the days were ticking toward the end of 2017, I started fielding more and more calls from clients and contacts alike.  The vast changes to the tax code, including seismic changes in how businesses were going to be taxed, had the phones and emails buzzing.

Clients asked me whether they should check the box and elect to be taxed as a corporation.  Some were asking me if they should move their sole proprietorships into LLCs and some were asking me whether they should convert their S Corp into a C Corp.  Accountants and Financial Advisors, flooded with anxious clients communications, were asking me for advice and more importantly were asking me if I could get things done by the end of the year, or by March 15.  All of these questions revolve around the same theme that I have been talking to clients about for 20 years.  Should I incorporate my business?

The answer is an unqualified YES.  A client of mine, trying to determine if incorporation was necessary and useful for her new human resources consulting business, asked me if incorporation was worth all of the paperwork that she thought she needed to complete.  Of course; and whenever I speak to my clients about incorporation, I always fall back to my Incorporation Four Prong Test.

Do you want to risk losing your personal assets?  The universal answer to this question of course is “no.”  Now if you are starting your side art business or your freelance writing gig, you don’t need to necessarily incorporate your business – just obtain some liability insurance.  But if you are dealing with the public in any way; providing services or goods with or to businesses; or driving your car, you need to protect yourself.  Incorporating your business means that litigants can only go after the businesses assets and not your own.

Do you want to sign on to that contract personally?  If you are leasing equipment, leasing real estate, or if you are borrowing money, entering into them in the name of your incorporated entity is always best.  You must of course be careful not to sign these agreements personally and of course you may have to physically sign personally – especially if you are borrowing money.  But as long as the contract is with your entity and not you, you always have the ability to “get out of” the agreement as a last resort.

Do you like your business to have legitimacy?  This is one that my clients like to think about the most.  A company called “Smith and Sons” just doesn’t have the same ring as “Smith and Sons, Inc.”  I often explain to my clients that customers and other service providers always appreciate the professionalism and legitimacy that “Inc.” and “LLC” provide at the end of the company’s name.

Do you want to have something to leave for your family?  If you own shares, units of membership interests or partnership interests in your business, you have the tools necessary to do succession planning, particularly if your children are interested in joining your business as you near retirement age.  The gifting available in order to avoid taxes on the transfer of the business is made easy if you have shares, units or interests to gift.  A sole proprietorship does not have this same ability.  These kinds of businesses usually end when the principal retires.

Answers to these four prongs oftentimes leads to the conclusion that incorporation is the right move to make.  Starting a business is one of the most important decisions you will ever make.  Start it off the right way by incorporating your business.