The longer you delay establishing business credit,
the longer you delay taking advantage of business loans.— Wells Fargo Bank
Each time you provide a personal guarantee for any type of credit extended to your business, you jeopardize your personal assets, such as savings and investment accounts, your car and even your home. If your business can’t pay off its debt, the bank will come looking for you to make good on the loan.
A business entity established as a sole proprietorship is most susceptible to this risk. Although you can build business credit as a sole proprietor, you will be completely liable for all personal and corporate debt. Your credit history will be based solely on activity associated with your social security number because you will not have a corporate tax ID number. As a sole proprietor, you also have no legal means for separating corporate and personal credit.
The best way to protect your personal assets is to incorporate your business. You’ll shield yourself from personal liability for the company’s debts and typically will also reduce your tax burden.
If you need help incorporating or building good business credit, click here for a complimentary business credit consultation and to obtain our free e-Book, "Unlimited Business Financing – Without a Personal Guarantee” – a step-by-step process for building a business credit asset.
Flickr photo credit: wwworks
Dee M. says:
I've been told that we SHOULDN'T incorporate until we get considerably larger and better organized because 1) my husband/partner and I are flaky creative types at heart and right now we're not well organized enough to do all the paperwork that a corporation requires (with big penalties if you screw it up) and 2) all of our assets are in our company -- grip truck, lighting, sound and camera equipment. We rent, we have zero money and a 10 year old car. There is nothing to grab.
Submitted Oct 14, 2009 3:05 PM
Walter G. says:
I agree - for some businesses incorporation seems like an unnecessary formality. Even if you have no apparent assets in your business, you might have assets in your personal life that you don’t want to risk. One benefit of a LLC or S-Corp is creating a barrier between the business and personal assets. Further, by establishing a corporation now, you will have the opportunity to build a maturing history of credit and income that can help you and your partners in growing the business down the road. With this said, you do need to follow some basic guidelines for properly incorporating and maintaining the corporation year over year so you fully benefit from corporate laws. For the most part the cost and effort is modest compared to very real benefits in the future such as tax advantages, expanded Retirement savings, liability mitigation, etc.
Submitted Oct 14, 2009 4:46 PM
mark R. says:
Find someone who will do your paperwork for you. Even if you have no income or no assets in your business right now, someday you will. Do not put yourself or your business at risk. Make sure you have that shield in place. The cost is worth the protection.
Also, make sure you have business insurance. Once again, it will protect you, in our litigious society, it should be one of your first decisions.
Mark
www.atomicpenny.com
Submitted Oct 18, 2009 2:12 PM
Shimika K. says:
What advice do you have for someone who has put up the house, kids, and savings account to secure a business loan? Is there a way out?
Shimika
www.entouragebeauty.com
Submitted Oct 20, 2009 6:42 PM
Trent L. says:
Shimika, we help businesses just like yours. It would have been preferable to have worked with you prior to you securing the loans, as we would have been able to help you secure with less or maybe nothing at all.
Either way, what is done is done and we can't change that, but what we can change is your business credit situation for the next time you need a loan or want to refinance. If you start now to properly establish a business credit asset for your company you will be in a much better position next time.
Submitted Oct 21, 2009 10:22 AM
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