I always thought when someone starts their own business, they can run it however they see fit.
But then I learned about these types of companies (S-corporations, C-corporations, LLCs, etc) with all these complicated rules.
So businesses can’t just govern themselves however they want? Like why do corporations have to have a board of directors (whad if a company doesn’t want one)? Man, that’s so damn restrictive!
In: Economics
You *can* just “run your company” as a sole proprietorship. Incorporation, however, gives you legal & financial advantages. If the government is going to grant you special privileges, they’re allowed to put conditions on how you must run your business.
Businesses can govern themselves just about any way they want, so long as they’re not doing anything illegal. Being a sole-proprietor or a partnership generally allows you to avoid having to adhere to a specific legal structure, and lots of small businesses are run that way. However, as a sole proprietor, you are fully responsible for all liabilities of the business, and all of your assets and earnings (from the business and elsewhere) are exposed. And as a partner, your assets and earnings are fully exposed for the company’s liabilities even if those liabilities arise from something your partner does. So many people who have small businesses choose to incorporate which limits legal liability for the company’s actions and debts to the assets of the company itself (and not the individual owner(s)’s assets and earnings that are held or gained outside the company). This approach is not without requirements though, and these can include preparing and filing certain paperwork, filing tax returns and tracking income differently, having a board of directors, etc. An LLC (limited liability company) is a form of incorporation used by many small businesses, and S-Corp and C-Corp are other forms of incorporation. They each have advantages and disadvantages. There are also PCs (professional corporations) or PAs (professional associations) for businesses like accountants, doctors, lawyers, etc. – “professionals” who have personal liability for things they do as professionals (so a doctor can’t avoid liability for a medical mistake by incorporating, but he/she can limit liability for a non-medical exposure like a patient slipping on a doctor’s office floor ad getting hurt).
Bottom line – if you want to limit potential exposure (which you almost always want to do), you need to comply with some rules and requirements. These are found in the laws governing incorporation. But if you find those rules too onerous, you can just decide to keep all the liabilities and do your own thing.
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