Hi everyone my name is Tania Shah and I’m with In the know legal. I’m a co-founder and I’m also a business attorney. Now just a little bit of housekeeping before we get started. Even though I’m an attorney, I’m not your attorney. Today’s segment is about choosing your legal business entity, but before I get into the specifics about corporations, sole proprietorships and limited liability companies, I want to clear up a few myths surrounding whether or not you should be an incorporated entity.
Low Risk Industry
So the first myth that I want to clear up is: “I’m in a low risk industry so I do not need to form a separate legal entity.” In limited instances being a sole proprietor may be all you need and I will discuss that in my next segment. But separating yourself from your business also legitimizes your business (and everyone wants their business to be legitimate). Here’s a few things t I mean by that:
- Your business should have its own numerical identity, the nine digital employer identification numbers that are assigned to it.
- Your business should have its own bank account, so your personal funds are distinct and separate from your business funds and your business should be a separate legal entity to protect your entity and personal information.
My CPA Knows What Entity is Best For Me.
The second myth. Your CPA knows a lot of things, I love your CPA, I love my CPA .Remember that your entity structure has distinct legal implications on how your entity should be taxed. Tax specialists will walk you through the specific tax implications of your structure and your business attorney will talk about what business structure best fits the kind of business you are doing. You should not as your tax specialist what you should do legally just like you never want to ask me to do your taxes.
Professional Liability Insurance
Third myth: “I have professional liability insurance so I do not need a legal entity.” So if you are trying to decide whether you need to get incorporated or whether you need insurance, the answer is you are actually asking the wrong question. Making your business a legally separate person and getting business insurance are not interchangeable (just like having business attorney and a CPA is not interchangeable.) So, first you want to separate the legal business entity and then you want to protect both you and that entity. You need to separate your business to protect your personal assets, then you need insurance in those instances that your personal assets are in jeopardy. For example you are commingling funds or if you held yourself out as your business, there is no separation between yourself and business or if you personally guaranteed a loan or lease. Also remember insurance companies are not in business of paying out, they have many policy exclusions and limits to insurance. So if your business is not incorporated and a judgment or debt is not covered by your insurance, then you become personally liable. So what we want is both insurance and a separate legal entity.
In my next segment I’m going to talk about what legal entity might be your best choice. I will see you next time.