To put the question another way: Why incorporate? The short answer is that a corporation, properly formed and maintained, protects the owner if there’s a lawsuit against the corporation. If the corporation is sued, and loses, only the corporation’s assets can be used to satisfy the liability. The owner’s personal assets – his car, his bank accounts, his home – are not at risk.

Absolutely; there are numerous cases that acknowledge a person’s right to form a corporation in order to limit liability, to limit exposure to risk. Why is this? Because allowing an individual to go into business without risking her home and her personal property encourages people to start businesses; that in turn spurs growth in the economy and puts people to work. (By the way, I’m speaking of corporations but the same is true for LLCs.)

No. If you think of the corporation as a separate person (which it is, legally) the answer may become clear. When a person is born, the process doesn’t end there – that’s just the beginning. It’s the same with a corporation: the corporate person has to grow and be maintained. It should have its own assets – bank account, vehicle registered in the company’s name, etc. It will need licenses, permits, its own Tax ID number. It must also, as the lawyers would say, “observe the formalities”: have a shareholders’ meeting every year and have a Directors’ meeting periodically, at least once a year. (The records of these meetings are known as “minutes”, and should be kept in that dust-gathering binder known as the “minute book”.) It is the observation of these formalities, and maintaining the separate identity of the corporation, that provides the protection that business owners sought.

Note: none of this protection is obtained by doing business through a sole proprietorship.

Generally speaking, there is little that a corporation can do that an LLC cannot, and vice versa; and in either case, maintaining the entity after it is formed is of critical importance. Without it, the benefit of forming a separate entity may be lost.

Next month we’ll discuss some of the differences between a corporation and an LLC.