Knowing When to Move up

Dear Dave,

I started a small business a few years ago. Since then, it's grown larger than I anticipated. When should you change from a sole proprietorship to something else?


Dear Mike,

I would incorporate the business into a Sub-S Corp when it becomes large enough that liability and lawsuits are a concern, especially if you're in a business that is litigious in nature. I ran my company as a sole proprietorship for a few years, but once we grew to 20 or 30 team members and saw the potential for bad things to happen, we changed to a Sub-S.

Incorporating is also a good idea if you're worried about protecting your personal assets. If you're worth a few million and decide to open a business, the last thing you want is for somebody to sue you and take all your money because they fell down on your property and bumped their head. You can keep that from happening by standing behind what lawyers call "the corporate veil."

Make sure you've got liability insurance and good basic business insurance in place, too. A corporate veil is always a good idea once you've got some wealth or your company starts to generate a lot of money!

- Dave

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