I recommend prompt incorporation or, alternatively, formation of a limited liability company to clients whose businesses will have a significant number of “active” employees who perform public functions (such as driving trucks, or installing roofs) and who are at greater risk of being responsible for an accident or other form of personal injury or property damage liability. Often-times however I recommend that people just starting their business operate as a sole proprietor, for at least a year before considering forming an entity. They save money initially by not incurring the cost of incorporating or forming a LLC (thereby preserving their initial capital to buy inventory, lease property and such). It also gives them a chance to make sure the business is viable and “has legs”. It’s a waste of money to form a corporation that fails within a year.
Such delayed entity formation can also permit the owner to find out how the business should be operated, what risks exist and to “road test” it for a while. Once it’s determined that the business is viable, and needs to undertake activities that create a heightened risk of tort liability, the owner should consult with an attorney and talk about entity formation. In most cases, the client can incorporate or form an LLC without incurring any tax liability due to provisions under Section 351 of the Internal Revenue Code.
There is no tax disadvantage to waiting. However, the owners must always carry adequate commercial liability insurance. A homeowner’s policy won’t cover business operations.
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