Small Business Risk – How to Avoid It
One of the best ways to separate business and personal financial interests is to have your business become incorporated. This step will immediately reduce personal liabilities for any of the debts and responsibilities of the business from the owners or operators of the business. To become incorporated means to create a wall between these interests so that the business can operate free from personal interests and the person or individuals do not have to bear all of the responsibility for being in business.
To become incorporated also means that there is an agreement to operate the business under a series of specified conditions. They include separating the ambitions and interests of a number of groups who may stand to gain or lose from the operations of the business. Each group is provided rights and bears some of the responsibility for the ultimate success or failure of the corporation.
The owners of a corporation are the shareholders. They can purchase or be granted shares in the corporation and they hold the legal ownership of the corporation as specified in the articles of incorporation. The shareholders in a business that has become incorporated elect a Board of Directors to oversee the corporation and also elect the Officers of the corporation such as the President, Chief Operating Officer, Treasurer, and Secretary. The Officers are responsible for the day to day operations of the corporation and the Board of Directors oversees their work. The Board reports on business activities to the shareholders at a general meeting which must be held every year.
The step to become incorporated is a sign of maturity for a business, especially a small business. Many successful businesses also operate as LLCs or limited liability companies, an action that accomplishes many of the same objectives as the move to become incorporated. Others opt for the even simpler processes of registering as a sole proprietor or partnership, both of which cost far less than the somewhat lengthy process to become incorporated, however they lose the liability protection and some tax benefits.
A good business lawyer can help evaluate the decision to become incorporated and a qualified accountant can provide information on the tax advantages and possible downsides of moving in this direction. Once a decision is made to become incorporated then articles of incorporation must be filed with the state in which the business will become incorporated.
That might be the business’s home state or the state in which a majority of the Board of Directors reside, or it can be in a state that provides certain advantages and tax breaks if a business chooses to incorporate there.