Small Business

S-Corporations: The "S" Means Smart


By Karen E. Klein Q: I want to start my own consulting business. After much reading and research, it seems that setting up an S-corporation would protect my personal assets and still provide corporation status. Can an individual incorporate if the business is only one person? -- J.H., Los Angeles

A: Yes. There was a time when certain states required two or three people as incorporators, but all states now allow single-individual corporation. There are a number of reasons why you might want to take the step you're considering. The two most frequently cited: to provide a degree of personal-asset protection, and to confer greater tax benefits.

Operating a business as a sole proprietorship -- without the protection of a legal business entity -- leaves an entrepreneur personally liable for all debts and obligations. For instance, the owner of a sole proprietorship would be personally exposed to lawsuits from customers for injuries or damages occurring on the premises of the business, or arising from the business operation. Tax obligations and a sole proprietorship's debts also become the owner's responsibility. Operating a company under the legal status of a corporation, however, shields the owner from most personal liability.

Remember, however, that you don't completely shed all financial responsibilities just by setting up a corporation, warns Gene Fairbrother, a small-business consultant with MBA Consulting in Coppell, Tex. "You generally cannot circumvent liability for your own actions," he says, adding: "Just about every officer and board of director is being personally sued in the Enron case." Remember also that incorporating does not protect your personal assets if you do not maintain minutes, as set forth by state law, if you do not comply with federal laws and regulations regarding the formation and operation of a corporation, or if you commingle personal funds or funds from another business with the corporation.

SIMPLE STEPS. The second reason to incorporate is the greater tax advantages a corporation offers. Whether incorporating can save you in taxes or not can only be determined if you review your financials and make some projections. Tax law is extremely complex and you should consult an accountant or business attorney familiar with legal-entity issues in order to help you decide whether to incorporate and which type of corporation to choose, Fairbrother advises.

As for setting up your corporation, you should be able to complete the filing on your own since you're just one person, if the company issues are fairly straightforward. Most large bookstores carry guides on do-it-yourself incorporation, as does legal self-help Web site Nolo.com.

In California, you can get information on incorporating, as well as templates, from the Web site of the Secretary of State along with tips on the filing process. If you run into trouble or have difficulty understanding the incorporation procedure, Fairbrother says, get some professional help. Have a question about running your business? Ask our small-business experts. Send us an e-mail at smartanswers@businessweek.com, or write to Smart Answers, BW Online, 46th Floor, 1221 Avenue of the Americas, New York, NY 10020. Please include your real name and phone number in case we need more information; only your initials and city will be printed. Because of the volume of mail, we won't be able to respond to all questions personally.


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