We owned a Sole Proprietorship for many years. We then filed as a Corporation, which we held for almost 5 years, before reverting back to a Sole Proprietorship.

Having been there, I have to say I we will choose from this point forward to avoid filing as a Corporation again. Since we reverted, I have learned that the reasons why we initially chose to go back to a Sole Proprietorship are only a handful of the many reasons why we would not now file as a Corporation.

The reasons commonly given for needing a corporate structure are completely false. The most common reason is that it offers "more legal and financial protection".

This is actually not true. There are in fact very few instances in which it offers more than a Sole Proprietorship, and in those instances, there are simple ways to replace that protection with something equally, or even more effective, and a whole lot less expensive.

Let's consider...

Liability. Company decisionmakers are often named personally in liability suits. Protection gone. Insurance can be purchased to do the job more effectively.

Bankruptcy. Only relevant if your company carries fairly significant debt, AND if your company is over three years old, AND if your company actually has a good credit rating. Prior to three years (more on many debts), a garantor is required - that's right, YOU assume the risk, not the company. No protection. None. And if you DO have an older company, and the company liquidation fails to yield sufficient to pay the creditors, they will often go after decisionmakers personally, in a personal lawsuit. Avoidance of debt eliminates the need for concern, and it is easier to start a company without debt if it is NOT a corporation.

What a corporation does, is increase your costs.

Taxes are more complex for corporations, and corporations must pay employment taxes on everybody, including the owner, which are not required for Sole Proprietors. If you do not hire employees (and there are many ways to expand without doing so), you are still forced to go through all the hassle of HAVING employees with a corporation, simply because that is what YOU become when you own a corporation.

Regulations are more complicated for corporations as well, which increases costs and time for compliance. Typically corporations will actually take on more of a regulatory burden than they need to as well. The profit hit from this can be minor, to monstrous.

Liability insurance costs more. A lot more. Because people are more likely to sue a corporation than a Sole Proprietor.

The ONE benefit we found, was that SOME customers took us a little more seriously, and thought that the "inc" legitimized us more so it was easier to make the sale with those people. This difference was small enough that the additional costs did not make it worth it.

We got more calls from sales people, more time wasted by charities calling for handouts, and more time wasted by people wanting to network but not knowing what it really meant (in other words, they wanted to take advantage of us without offering anything in return).

So why does everyone say that you get more protection as a Corporation? Very simply... their information all comes from the same four sources:

1. The Government. The government PROFITS from corporations more than from sole proprietorships. They have a motive for recommending them. Schools, colleges, the SBA, and most other "official" sources that you search will use information originally produced by the government. State governments also make more from corporations, and may not even have a fee for sole proprietors.

2. Lawyers. It costs about $500 (probably more now) to have a lawyer draw up Articles of Incorporation. What he does is this... He hands your info to his secretary, who opens up a standard boilerplate document, puts your name in the name field, sticks the date in the date field, puts the officers names where they belong, and the corporate address where it goes, prints that out, and sends it off to the Capitol of that state with the required fee. Nice profit on 5 minutes of work. Really! Of COURSE they are going to recommend that you incorporate, there are no legal fees for a sole proprietorship.

3. Accountants. The bookkeeping for a corporation is much more complex than for a sole proprietorship. The majority of sole proprietors do their own books. Follow the money. There is a definite financial motive for accountants to recommend a more complex business structure.

4. Specialists, Experts, Consultants, and other assorted writers, all of whom have received their information from one of the above three sources. None of them have actually done the research to see if it is true, they simply assume that it MUST be true. Even if they suspect it is not, they will not have the courage to say so... after all, most of them make more money from corporations. Sole proprietors hire consultants less often, and pay much less for them.

Now, I know some good accountants. Unfortunately at this time I can't say I know ANY good lawyers, though I do know OF a few that I'd trust with my life. This is not a condemnation of anyone in particular, just pointing out that once a statement is made about business, and endorsed by someone with the power to proliferate it to everyone that has the power to say so, the statement is taken as fact, even when it is far from true. This is the case with MANY business concepts, methods, and recommendations.

So no, I would not file as a corporation again. I will not hire employees, and I will continue to make money more efficiently, and keep more of it for the needs of my family.

Been there. Don't want to go back.