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If you are operating as a sole-proprietor or general partnership, I’m hoping that your
occupation is being a daredevil because you are currently engaging in the most dangerous
form of doing business. If you don’t feel like reading a big article, just read this next
line… If you are operating as a sole-proprietor or general partnership, you are risking
your family, your future and your livelihood if you do not incorporate immediately.
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Obviously, you are toying with the idea of incorporating your business or you probably wouldn’t be reading
this. So… now you’re here and I’m telling you that this world is getting more and more litigious every day
and your chances of getting sued (either professionally or personally) are extremely good. It could happen
today, it could happen tomorrow, it can (and will!) happen when you least expect it. That old adage “you
aren’t in business until you’ve been sued,” does come from somewhere. If a simple DBA or "Doing Business As..." (a fictitious firm
name filing) is the only wall shielding your business and YOU from potential creditors, then you might as
well just hand all of your hard-earned assets over on a silver platter.
When you operate as a sole-proprietorship, you are entirely and personally responsible for the actions of
the company. For instance, if you own a bakeshop and a customer slips in your store and sues your shop, then your
personal assets (your bank account, your kids college fund, your house, your car, everything!) is up for
grabs. Likewise, if you get into a car accident and you are sued personally, then your business – everything
you’ve put years into building – can be seized.
It only gets worse if you have partners (what is called a general partnership) and you are operating under
only a DBA. In this case, you are not only personally responsible for your own actions in the business, but
you are also personally responsible for the actions of your partners – even if you didn’t have a hand in the
decisions! If a partner gets sued personally for anything like say skipping out on his or her landlord or an
auto accident, his or her share of the assets can be taken away and liquidated. This means that your business
can be torn apart without notice!
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Want to raise capital? If you are only operating under a DBA, you can't sell a piece of the action
to any potential investors. With a corporation or LLC, investors can buy shares of the business and
give you the much-needed money that you need to grow your company!
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I Don’t Need To Incorporate! – I Already Have Insurance! I agree with you that insurance is a wonderful
thing, however you need to consider a few points:
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Insurance policies more than often do not cover the full amount of a judgment. There are thousands
of horror stories about business owners that thought insurance was enough. I often reference this
guy that had a small landscaping company and had $1 Million in coverage. Sounds like a lot huh?
Well he thought so too until there was an accident involving a careless employee, a lawn mower
and a customer’s child. The judgment was $1.4 million. Care to guess where the other $400,000 came
from? Not to mention the plaintiff’s attorney fees.
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Insurance policies are exorbitantly expensive. I am just going to assume that you’ve at some time
purchased ANY type of insurance. If you have, this point needs to explanation.
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Insurance policies will often refuse to pay for absurd reasons. Insurance companies will refuse to
pay for whatever reason they can. I saw on TV just yesterday where a home was flooded with raw
sewage (yuck!) as a result of flooding in the area which caused pressure to build in the sewer and
pushed it up through their pipes flooding the home. The insurance company refused to pay citing
that it was an “Act of God.” If you believe in God, then it could be argued that EVERYTHING is an
act of God. I don’t think I’m stretching when I say that while insurance companies are perfectly
fine in accepting your payments every month, they are a little more difficult when it comes to
getting them to pay for something when you invoke your policy.
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The only way to really guarantee the safety of your personal assets is to form a corporation or
limited-liability company (“LLC”). When your business is operated under the protection of one of
these entities, then immediately, all of the creditors of your business are automatically restricted
to only seizing your business assets. This means that anything not in the business – including your
home, savings, and savings – are safe from seizure. In the corporate world, this is called the “veil
of limited liability” or the “corporate veil”.
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Fact! - Because they are considered partnerships, Limited-Liability Companies have an extra level of
protection called "charging order" protection which shields your business assets from any lawsuits
that you may be involved with personally.
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My Accountant Said That I Don’t Make Enough Money To Justify Incorporating. Clients often come to us
saying that they haven’t incorporated “yet” because their accountant told them that it was not
yet necessary. Unless your accountant is also an attorney (hey, it happens!), understand that these professionals
are generally only “professional” at one thing… taxes. While they mean well, by telling you that you don’t make enough to
incorporate, they are only giving you tax advice and not taking into account the risks of
litigation and creditors which can complete wipe you out financially in one swoop. (Try asking your
attorney the same question and see what he or she says!)
No matter how little you make, if you are doing any business at all then it is a great idea to consider
forming a limited-liability company or an s-corporation. Both of these entities have the same sort of
pass-through taxation that you are used to as a sole-proprietorship, but they also offer you the basic
level of protection that you need in order to sleep at night, knowing your livelihood is not at stake.
I Don’t Have a House or Savings or Anything Worth Taking. I am just going to assume that if you have
started your own business, you probably did so with some plan to eventually own something, be it cash
or property. (If this is not your plan, or you just like to live on the edge, then by all means, you are
fine operating as a sole-proprietorship).
Assuming that you DO want to accumulate as much cash and property as you can, remember that the really (not)
fun thing about losing a lawsuit is that a judgment doesn’t just affect what you have now, but it affects
anything and just about everything you will ever have in the future. If you inherit cash or property, if you
eventually own a home, if you get a great new job, or even if you marry someone five years after your judgment
and they own a house, then all of this is up for grabs (and I’m sure your new spouse will probably not appreciate
losing their house over a judgment you incurred before they met you!).
This is the great thing about lawsuits if you actually win one. It isn’t just about what the defendant has
now but your judgment lives on to whatever they have in the future.
Forming a corporation or limited-liability company isn’t as difficult as it may seem… with MyLLC.com, all
that is required is a credit card and the name that you would like your entity to be called. It can all be
done online, and your new entity can be ready in as soon as a few days! Usually with only a small investment
of a few hundred dollars!
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Order a New
Corporation or LLC Now!
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