Notice, I said ?potentially.? Just because you operate your business as an INC or LLC doesn?t mean that there is no way a creditor can go after your personal assets as an owner (or representative) of that INC or LLC. If you personally sign for a bank loan, on behalf of your business, and your business cannot pay, you become personally liable for that loan. If you cannot pay, then the bank can go after your personal assets. Likewise, if you act negligently as a representative of your business, you may be personally liable for a lawsuit (in addition to your business) due to your negligence. Just think of those officers and directors of Enron or Worldcom that are being sued for negligence.

Additionally, lawyers will sometimes attempt to ?pierce the veil? of protection of the INC or LLC and go after the owners personally in a lawsuit. This can easily happen if you fail to pay your state?s annual report fees or franchise taxes. This can also happen if you fail to maintain your corporation?s organizational paperwork (i.e. minutes, bylaws, etc.).

However, if you operate your INC or LLC properly; you don?t act outside of your duties as an officer/member/manager/director; and you don?t sign personally for your company?s debts, you will limit your liability. Even a business just starting out, with little income or assets, may want to form an INC or LLC just for the liability protection.

INCOME TAX SAVINGS
In most cases, forming a corporation or limited liability company will save you money on your federal and sometimes your state income taxes. This is because an INC/LLC is recognized as a separate entity with its own tax rules (and often its own rate schedules) from a sole proprietor.

Sole proprietors figure business income and expenses on a Schedule C and pay personal income taxes on the net income. Corporations (and many cases LLCs) file separate returns for the business income and expenses. C Corporations actually pay taxes, based on it?s own income tax rate schedule, on its net income. The owners (stockholders) only get taxed on the dividends they receive (NOTE: As of the writing of this article, dividends are fully taxable as ordinary income to individuals. However, there are several proposals being discussed to reduce or eliminate federal income taxes on dividends. This benefit may make forming a C Corporation more beneficial to more business owners). Sub S Corporations and most LLCs (except those taxed as a C Corporation and entity disregarded) file an informational return which disclose the net tax loss or income of the business and what is each owner?s representative share of the net loss or income.

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