To say it has been a rough three years or so would be a rather minor understatement. Nearly everyone has been hurt in one way or another. Those that have escaped pain have certainly worried about it during sleepless nights. The Great Recession has been a brute, but it has also taught us some very important lessons. One is the value of incorporating your business.
Why should you incorporate a business? Okay, monotonously answer along with me. You should incorporate to shield yourself against the prospects of a large lawsuit. As long as you maintain corporate formalities, your home, car and assets will be protected from creditors. Of course, you will probably lose them since you no longer have a company and can't pay your bills, but I digress! More importantly, the Great Recession has shown us another reason forming a corporation or limited liability company is important - to deal with debt.
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If there is one area of business that has actually boomed during the last few years, it is anything that has to do with business failures. For bankruptcy attorneys, for instance, times have never been better as they have people and businesses lining up at their doors. And what will these attorneys tell you? Filing bankruptcy on an incorporated business is far better than doing an unincorporated one. Let's look at examples why.
In our first example, I own a small escrow company. Real estate has been in the pits and I have to close the doors. I owe the landlord six more months on the lease at $2,000 a month and have other bills totaling $35,000 on the business. I never incorporated. Guess what the creditors are going to do? They are going to come to me for the debts of the business and I will either pay them or seek bankruptcy protection.
Now take the same example, but assume I incorporated or formed an LLC. How differently do things play out? Very differently. Why? The debts are the debts of the business entity, not me personally. As a result, the creditors can only go after the now defunct business to get their money. Should they try to come after me personally, they will be barred from doing so. I can literally walk across the street and start a new escrow business the next day and there is nothing they can do. Of course, I'll be incorporating that new business!
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