Knowing When To Move Up

The good news is that Mike's sole proprietorship is growing, but he wants to know the next move to keep it safe.

QUESTION: Mike started a small business and it has grown bigger than he thought. When should he change from a sole proprietorship to something else? Dave gives a few examples of when to know when to upgrade.

ANSWER: I would incorporate the business into a sub S-corp when the business becomes large enough that you are concerned you will attract lawsuits, or if you’re in a business that is litigious. My business was a sole proprietorship for a while, but when we got to 20 or 30 employees, we changed it to a sub S-corporation.

Or, if you have large enough personal assets that you’re worried about something happening at the business to where someone would get at your personal stuff, you would incorporate. If you are worth a few million and wanted to open a business, you don’t want someone to sue you and take your money because they fell down on your property and bumped their head.

You also need good liability insurance and basic business insurance plans anyway to cover a lot of those things. A good corporate veil is a good idea once you have some personal wealth or the business is starting to have some wealth.