ForumsStarting a Business

Worries about liability, Welcome

If you have a Professional (your Accountant) who knows you and your background.
You also visited SCORE and both suggest s sole prop. Then go for it.

It also easier to chance from a Sole Prop to a CORP later.

Yes the final decision is yours. Good luck, LUCKIEST

I've offered this viewpoint in the forums before (and always get disagreement from some members) -- but in general, I think if you CAN start-up as a sole proprietor, you probably should. When the day comes that you can't operate that way (i.e., if you take on a business partner, need outside owners or investors, have employees for whom you want to provide profit sharing, etc.), then you can form the entity you need. Until then, why go the added expense and create the extra administrative overhead?

Limited liability might be your answer to that question, but for a newly-formed company or corporation, you are going to have to personally guarantee any significant debt or credit you obtain for your company in the beginning -- so there goes your limited liability in that regard. Further, if you're a one-person operation where you do all the work and make all the decisions for the business, anyone who has a reason to litigate is going to name you, personally, in the suit, not just your company.

So spending money on business liability insurance makes more sense to me than spending it on annual corporate registration fees, franchise taxes, (or whatever your state has). Spending your time generating revenue (especially in the first year) makes more sense to me than messing with the added administrative burden of a more complex business structure. Sure, there are exceptions to that, but if your accountant and SCORE counselor didn't think you were an exception, then you're probably not.

Hope that helps. Best wishes.

Good luck in your business venture. I feel that you would do well to consider forming an LLC and electing to file your taxes as a sole proprietor. That way you have the corporate form to protect you but you pay taxes as if you were self employed. One caveat. Having a corporation does not protect you if you do not have liability insurance. Courts have held that a prudent person would have insurance and since a corporation is considered a person they should also have liability insurance. There have been cases where the corporation did not have insurance and the court have pierced the corporate veil and held the stockholders responsible.

The big difference as I see it is if you are a sole proprietor and you are sued and you lose, the insurance company will pay up to the limits of the policy and then wish you well and walk away. If the judgement is larger than the policy limits, then you will be liable and could lose everything you own. In the case of the LLC if you lose, the insurance company will again pay to the limits of the policy and wish you well. But then you hand over the keys to the business and walk away. Your liability is limited to your investment in the business, not everything you own.
More food for thought.

Mike Crosa CPA, Certified QuickBooks Pro Advisor
Helping my clients increase their bottom line
www.businessprofits.com
coachmike@businessprofits.com
877-538-4395

CoachMike, are you saying that a plaintiff couldn't/wouldn't sue both an LLC and the LLC's single/member manager in the case of something like negligence or inaction (breach of duty). If so, then I'd have to disagree (at least as I understand how attorneys pursue tort cases against businesses in most states). If not, then wouldn't the ultimate outcome be the same for the business owner (sole proprietor or LLC single member) either way?

CoachMike, thanks for the reply. I understand your point re: a grocery store (which would meet one or more of the criteria I listed for considering a corporate structure). This isn't a grocery store, or even a brick-and-mortar business. The owner asking the question sells jewelry at home parties, and wouldn't even see or handle the actual item sold and shipped to a customer in most cases. I'm just not able to figure a real benefit for the owner in having a more complex business structure than a sole proprietorship at start-up in this specific case.

Different perspectives . . . not a bad thing to have in a community like this. Best wishes.

Good point, CoachMike -- that would be what, $125/year (if the owner can DIY, more if the owner needs an attorney or filing service)? If I'm not getting any tangible benefit, I'd rather have the money for advertising or inventory -- but that only makes it the right answer for me, not someone else. I think we've done a good job of explaining two viable options and the rationale for each. I wish more of the "question" threads evolved this way. Regards - DH.

I was just wondering silverjewelry what decision you had come to.