Should you incorporate your home business?

Big-time companies -- like Starbucks , Google, and GE -- are organized as corporations. But what about your home-based business?

Well, it's definitely something to consider. For example, suppose you have a contract with a client and things go wrong. The client is threatening a lawsuit.

If you are set up as a sole proprietorship, then your personal assets may be subject to the lawsuit. Unfortunately, there have been cases where home-business owners have had to sell some key assets to deal with such liabilities.

But, if you organized your home business as a corporation, then you get some nice liability protections. The rule is that your liability limited to your investment in the corporation (there are exceptions, such as for personal injury lawsuits, fraud and so on).

And yes, there are other benefits. For example, a corporation gives your business an extra credibility boost. Moreover, if you are thinking of raising money, the corporate structure makes things easier – primarily because investors are shielded from liability.

Keep in mind that there are various forms of a corporation. Although, as for home businesses, the two common ones are Limited Liability Companies (LLCs) and S-Corporations. There are some differences in each, such as in terms of the number of shareholders, formalities and so on (in other words, you'll need to do some research).

So how do you setup a corporation? Of course, you can consult an attorney. But, there are also a variety of quality online services, like LegalZoom, that can streamline the process and provide much lower fees.

Tom Taulli is the author of various books, including The Complete M&A Handbook and The Edgar Online Guide to Decoding Financial Statements.

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