Using an entity makes good business sense, saves you thousands in taxes and protects you from devastating personal lawsuits. So why isn’t making the switch from a sole proprietorship to an entity something that’s second nature to fledgling businesses?

Small businesses, especially startups, think that becoming a business entity is something that only huge corporations do, so the founder generally sets up the company as a sole proprietorship. Even when the company grows and the classification doesn’t change, it can leave the company, board and affiliates vulnerable to lawsuits, resulting in the founder paying a ton of extra taxes out of their pocket.  

The distilled definition of a business entity is that it was created specifically to conduct a particular trade or business. It exists for that reason and is divorced from the personal finances and tax burden of its founder. By declaring your company an entity, you shield yourself and your stakeholders from certain ramifications and also establish credibility with potential lenders and board members.  

Creating an entity helps you in three key areas.

You Protect Your Assets

Not all entities are created equal, but S or C entity classifications draw a line in the sand that clearly separate your assets from the company’s financials, not counting any initial investment you put into the company. This is absolutely critical because it protects you from lawsuits or business financial disasters that could seep into your personal financial life.

In addition to covering your personal assets, you also create a hospitable environment for shareholders, board members and partners. They can join you without fear of losing their shirts and homes in a lawsuit. Shockingly, many companies don’t offer their board members protection from being personally sued, so if your company is under the umbrella of being an S or C classified entity, you’ll be automatically more attractive to high profile people who will want to serve in an advisory capacity.