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Why Incorporate?

Jennifer Reuting, author of Limited Liability Companies for Dummies™
Why Should I Incorporate? (or why being a sole-proprietor
or operating under a DBA is not enough!)
By Jennifer Reuting, author of Limited Liability Companies for Dummies™

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.

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!

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!
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:

Insurance policies, more frequently than not, will 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.

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 no explanation.

If your business is operating as a Corporation, Limited-Liability Company, Series LLC, or Limited Partnership, 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.

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, and savings – are safe from seizure. In the corporate world, this is called the “veil of limited liability” or the “corporate veil”.

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.

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 completely 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.

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®, 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!

- Jennifer Reuting

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