The primary advantage to having a business formed as a corporation is the fact that the shareholders are not personally liable for the debts and legal liabilities incurred by the corporation. For example, if a corporation is sued for business reasons and loses, the shareholders will not be required to satisfy the debts of the corporation from their own personal assets. This safeguards assets and properties of the individual shareholders, and as such, is more attractive to potential investors.
If you do not want to be personally responsible for the liabilities of the business, then you should create a separate legal entity such as a corporation or an LLC. A properly operated corporation or LLC limits the liability of its shareholders to the amount they invested in the company. If the company incurs debts or liabilities, the creditors are limited to the assets of the company. In the event the assets are insufficient to cover the debts of the business, creditors may not generally collect additional amounts from the shareholders. By contrast, a sole proprietor is personally liable for all the obligations of the business. This means that sole proprietors risks everything they own to satisfy the debts or judgments of their respective businesses, including their homes, cars and personal savings and investments.
Transferability of Ownership
If you plan to sell your business someday, then you should create a separate legal entity. Since a sole proprietorship does not have a life apart from its owner, it may not be transferred to a third party. In the event of a sale, each asset used in the business would have to be specifically identified and transferred. Buying a business is a lot more desirable if everything needed to operate the business exists in a distinct legal entity. In that case, the sale could be accomplished either by simply transferring all of the stock of the entity or all of the assets held by the entity.
If you want your business to continue beyond your lifetime, then you should incorporate or form an LLC. Sole proprietorships end upon the death of the owner. Corporations and LLC’s continue indefinitely unless they are dissolved. Their ownership interests can generally be sold, gifted or bequeathed to others.
If you want to share ownership with others, then you should incorporate, form an LLC, or at least consider forming a formal partnership. Corporations and LLC’s generally allow an unlimited number of shareholders (except S corporations, which have a limit of 100 shareholders).