I was asked by a sole proprietor if he really needs to set up a new entity for his business. As the operator of a service business for quite a while, he said that he uses very few assets in his business and that incorporating was too expensive. While there are filing fees and other costs associated with setting up a legal entity, he almost cannot afford not to. One of the key elements of establishing a legal entity is liability protection: in the event of a lawsuit or other unforseen liability a sole proprietor's personal assets (house, cars, etc.) are at risk to pay the costs. A legal entity such as a corporation or an LLC limits your personal liability and protects your personal assets.
Many startup business owners who have always gotten by with relying on bootstrapping with limited funds decide that they would rather take the risk of a lawsuit and not spend precious dollars on filing fees. But what does it actually cost? In Massachusetts, for example, the filing fee for a corporation is as low as $275 for most companies. You can file via the Massachusetts Secretary of State's Web site and be up and running within a day. However, you should consult a lawyer before doing so, and legal fees vary widely. Our firm charges a reasonable flat fee for most corporations; others may charge hourly rates.
You should also consult a tax advisor because there are tax ramifications of acquiring stock in a corporation, but some will actually provide a benefit to you.
There may be other start up costs depending on your situation, and you will have to invest a bit of time with recordkeeping. Though, either way, a small investment of time and money up front will give you piece of mind with your personal assets so you can focus on building your business.