To Incorporate or Not to Incorporate...That is the Question.

Ask 100 attorneys whether you should incorporate your new business and my guess is that at least 99 of them will question your sanity if you don't.  Attorneys, myself included, have been trained to be "risk adverse", so anything that you can do to protect yourself and your hard-earned assets gets an immediate "YES!!"  In fact, there was a time that I could not imagine a situation where you wouldn't incorporate.  Keep in mind, when I say "incorporate" I am using the broadest sense of the term which includes not only forming a corporation, but also a limited liability company, or "LLC".

When clients come to me to ask about forming a business entity, my mind immediately races to all the possible scenarios leading my client blindly into potential lawsuits, regardless of how plausible the lawsuit is.  One of my "go to" hypotheticals is the delivery boy working for a restaurant taking a deposit to the bank who "t-bones" a school bus full of first graders on there way home from a field trip to the zoo.  In my lawyer mind, the moped my errand boy is riding somehow morphs into a tank just before impact, causing such a horrific scene in my head, Stephen King would blush.  I would immediately tell my restaurant client she needs to incorporate immediately and keep that errand boy away from small children.

Then, we have "Grandma Emma" who supplements her retirement income by selling her handmade doilies online.  She has no employees, works out of her house, and mails all orders directly to the customers.  It becomes more difficult for me to imagine a fiery bus crash that ends Emma's business.  Thus, the question...When does a business need to incorporate?

First, we should keep in mind the purpose of incorporation, for the most part, is protecting personal (as opposed to business) assets.  Therefore, determine whether your business is of a nature that you have exposure to potential liability, and if so, how much exposure.  If at 50 years old, you have no debt, your house is paid for, and you decide to retire from a career working for "The Man" to fulfill your dream of becoming a skydiving instructor, I would say your new business venture has some potential exposure.  I can see Mr. Skydiver plummeting to earth with his first student strapped to his chest only to crash into a school bus of first graders returning from the field trip to the zoo.  (Watch out for the kid on the moped.)  On the other hand, Grandma Emma doesn't have too much exposure as she walks to her mailbox to send out the latest order of doilies.

Another factor for any business to consider is cost.  Aside from the cost for an attorney to prepare the documents to incorporate, you also get to pay for the privilege of having a business entity.  In Tennessee, where I practice, you get to pay the State every year.  Tom Carson Jones, CPA, CGMA with Steele, Martin, Jones & Company, PLC, of Jackson, Tennessee explains, "We're in Tennessee, with no regular state income tax.  If you go to being an LLC, that's a minimum of $400 in taxes per year (plus an extra tax return for me to file).  If we were in a state that has a personal income tax, that same LLC usually costs $10 to $50 per year...but a few states are closer to $200.  Point being is that the benefit of being an LLC (or a corporation) really depends on your state's tax structure.  Your brother-in-law from that other state really isn't the best source of information."

From the attorney perspective, it's a matter of whether you as a "sole proprietor" have enough potential exposure to justify the $400 expense.  If you are straight out of college with no house, a $200 Ford Pinto and a mountain of credit card debt with dreams of owning and operating a mobile car wash, maybe we need to see where you are in a few years before we incorporate.  On the other hand, if you are Mr. Skydiver, we need to talk ASAP.

Obviously, these examples are extreme on all fronts.  The best practice is to talk to your attorney and CPA to help you determine what is the best approach for you and your business.  No shoe fits every foot.

Special thanks to Tom Carson Jones, CPA, CGMA and "The Most Exciting CPA in Town" for his contributions.

Business Law Launch

  King & King, PLC is proud to announce the launch of its Business Law and Commercial Litigation Division. Our Mission is to establish a division of King & King, PLC, geared toward the needs of small to mid-sized businesses and to act as a general counsel at a reasonable cost to the client. 

  As a small business ourselves, we are familiar with the day-to-day obstacles small to mid-sized businesses face. Many of these obstacles are legal in nature and require a professional's advice - often a quick response is needed. King & King sets a new standard in the legal community of West Tennessee in the areas of client communication and accessibility through the use of technology. When you have questions, we will be there to get you the information you need to form a sound business decision. 

  King & King is constantly establishing new relationships with other businesses, thus establishing a network to assist small to mid-sized businesses, from business coaching, marketing, accounting and beyond. We want to see your business thrive and hope to be a resource for your business beyond your legal issues. 

  The Business Law and Commercial Litigation Division of King & King will provide general counsel services to the small to mid-sized businesses in West Tennessee at an affordable rate to the client. By establishing a regular monthly fee as opposed to an hourly rate for work as a general counsel, small businesses can discuss legal issues with its attorney and avoid legal pitfalls before they occur. 

  In addition, King & King will handle business formations, transactional work such as contracts, partnership agreements, buy-sell agreements, non-compete agreements, etc., at flat fee rates so that small to mid-sized businesses can better budget for legal issues. In the event unforeseen legal problems arise, King & King will be there to counsel and advocate for the businesses at a reasonable hourly rate. 

Here is a more specific description of the services we provide: 

Business Formation: 

King & King will assist new business owners in determining the type of business entity is the best fit for them and prepare the necessary documents to establish the new entity. Furthermore, King & King will advise and assist new businesses regarding the requirements for the new entity, such as annual meetings, annual filings with the State, etc. 

Drafting and Reviewing Contracts and Agreements: 

We will review existing agreements, contracts and invoices and prepare similar documents to put the client in the best position possible, including verification of such contractual elements as attorney fee and collection costs and interest on unpaid balances provisions. In addition, when a client enters into an agreement with another business, we will review any agreements presented to the client and work with the other business or its legal representative to draft a mutually agreeable contract. 

Litigation: 

Conflict is a reality of business. In the event clients find themselves in a legal battle, despite the best efforts to avoid such, King & King can provide top notch legal representation in and out of the courtroom. 

Alternative Dispute Resolution: 

As a Tennessee Supreme Court Rule 31 Family/Civil Mediator, Dusty King is conversant with the ADR process and can advise clients, not only if they are participating in the process, but on whether clients should include ADR provisions in their own work environment. 

Collections: 

Using alliances formed with collection agencies, King & King can provide collections services for those business clients who deal with accounts receivables. In the event litigation is not warranted, King & King will assist clients to determine the best direction to pursue the monies owed and, if justified, help them to choose an appropriate collection agency. If the softer approach is unsuccessful, then King & King is here to litigate and exercise the client’s post judgment legal rights to collect those monies owed it. In the event a customer files bankruptcy, King & King can advise our clients accordingly and take the steps to protect their interests. 

General Counsel Services: 

The best legal advice is the advice given before a business makes a move rather than after a problem arises. King & King will be available to discuss the client’s legal issues and take any steps possible to eliminate a problem before it starts. We will conduct any legal research necessary and thoroughly investigate a situation to assist the client in making the best decision for the client based upon the circumstances. 

Whether you have been in business for years or are just starting out, King & King, PLC can help.