Setting Up a Corporation Protects You From Liability
Sole proprietorship is one of the simplest and most common ways of organizing a business that a single individual owns and manages. While it can be a great form of organization for businesses that intend to remain small (or otherwise can’t justify the expenses of incorporating) and have little exposure to liability, sole proprietorship has its drawbacks as well.
One of the primary concerns is that, as a sole proprietor, you assume responsibility for all of your company’s liability. That means that you can be held both financially and legally accountable for any debts held by—or legal actions taken against—your company.
In contrast, setting up a Limited Liability Corporation (LLC) or other corporate business structure separates you from your business’s financial and legal liabilities. By incorporating your business, you will not be responsible or penalized for outstanding company debts or legal disputes. Setting up a corporation can also help you to leverage business credit and create access to better financing options.
Establishing Business Credit With an LLC
Using your personal credit, credit rating, and credit history to finance a business can affect your eligibility for loans, lines of credit, and other forms of financing. If you have bad credit and need a loan to start out your business—or if you just want be able to take advantage of the best small business financing options—then setting up a corporation is a necessity.
Once you’ve gone through the required steps and have successfully incorporated your business, you will be able to leverage anywhere from 10 to 100 times your personal credit capacity, simply by virtue of using business credit instead. Taking out a business loan, business line of credit, or business credit card can also help to establish your business credit history, which will go a long way toward securing financing in the future.
Additionally, all of your personal credit history, debts, and assets will be separated from those of your company. Only your business’s credit file will be accessible to other businesses and banks, which exclusively includes however much financial information you provide to the credit bureaus. Having a business credit file can encourage other companies to do business with you (and banks to lend to you), by demonstrating your company’s reliability.