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    15 Replies Latest reply on Jan 26, 2009 10:16 AM by weboffice

    Worries about liability - holding me back!

    silverjewelry Wayfarer
      I have been doing a lot of research via the internet and local library but can't seem to make my decision on the structure of my business.
      My accountant seems to think I should start out as a sole proprietorship. I also got some online counselling from SCORE and they tend to think the same way.
      My biggest concern is personal liability. I'm wondering which would make more sense monetarily - sole prop. with liability insurance or a Corporation or LLC (run as an S corp).
      Selling silver jewelry is not a risky business, as far as personal injury is concerned, but we live in such a litigious society (especially in south FL) that I am nervous about being sued and losing my home, savings, etc. My boyfriend has been in business for close to 50 years and he has stories!! He advised me to go the corporation route.
      I don't need a complicated business structure at this point but I don't want to be stupid (ignorant) and regret it in the long run.
      I want to get the ball rolling!
      I realize the final decision is mine alone but any expert advice is greatfully welcome.
      Thanks
        • Re: Worries about liability - holding me back!
          HarmikBurbank Wayfarer

          if your business has no liability what so ever and you doing it part time for now I suggest you go sole proprietorship,, if you are planing to Market and work with vendors then S Corp

           

          www.legalcpu.com

          Mick
          1 of 1 people found this helpful
          • Re: Worries about liability - holding me back!
            LUCKIEST Guide
            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
            • Re: Worries about liability - holding me back!
              silverjewelry Wayfarer
              Thank you both for your input.
              • Re: Worries about liability - holding me back!
                Lighthouse24 Ranger

                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.
                  • Re: Worries about liability - holding me back!
                    silverjewelry Wayfarer
                    Thank you, Lighthouse - it certainly does. I appreciate your reply.
                      • Re: Worries about liability - holding me back!
                        CoachMike Wayfarer
                        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
                          • Re: Worries about liability - holding me back!
                            silverjewelry Wayfarer
                            Thanks. Yes, a lot of food for thought and I appreciate every morsel!
                            • Re: Worries about liability - holding me back!
                              Lighthouse24 Ranger

                              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?
                                • Re: Worries about liability - holding me back!
                                  CoachMike Wayfarer
                                  Not at all Lighthouse. Lawyers can sue everybody in sight. The question is would they prevail. I'm sure in the case of personal negligence or breach of duty you could be sued. This is more true if you are a professional (CPA, Dr., Lawyer), than if you are a layman. I was referring more to the slip and fall types. For example, you slip in your local grocery store. You sue the store. I doubt that the manager of the store is going to be sued for negligence. If he is I would think the judge would throw it out. So to answer your question no I don't think the outcome would be the same.

                                  Mike Crosa CPA, Certified QuickBooks Pro Advisor
                                  Helping my clients increase their bottom line
                                  877-538-4392
                                    • Re: Worries about liability - holding me back!
                                      Lighthouse24 Ranger
                                      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.
                                        • Re: Worries about liability - holding me back!
                                          CoachMike Wayfarer
                                          Hi Lighthouse. I was not aware that the business was selling jewellry in home parties. And I tend to agree with you, but...if an accident occurs, who is going to get sued? The homeowner who provided the premises or our entrepreneur? I understand what you say about costs of having a corp., but in Florida there is no income tax and on a Sub S corp you file to notify Florida you are a Sub S and you are exempt from filing any more returns. So if she were an LLC her costs would be the upfront cost and then the annual fee for having a corp or llc. That would be it.

                                          Different perspectives...aint it fun :-)

                                          Mike Crosa
                                            • Re: Worries about liability - holding me back!
                                              Lighthouse24 Ranger
                                              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.
                                              • Re: Worries about liability - holding me back!
                                                weboffice Newbie
                                                CoachMike and Lighthouse - you both make excellent points. I'm definitely on board with Lighthouse in promoting non-incorporating until you determine the liability and feasibility of your new entity. Incorporating just sets you up for more expenses and headaches then you need when starting a new business. However, with regard to another thread that asked about an EIN, although I am a sole proprietor, I obtained an EIN because I didn't want to give out my social security number to everyone. Further, once you obtain an EIN as a sole proprietor, you can use that same EIN for as many entities as you choose - as long as you remain a sole proprietor. This certainly makes things much easier all the way around! I have two different businesses for which I use my EIN and I've never had a problem in the 8+ years I've been in business.

                                                Now, for the question at hand, if Silver is hosting "at home" jewelry parties, she will have liability in the respect that she is inviting people to her home. If someone should slip, trip or fall resulting in personal injury, she would be liable for damages if the person should sue. Her homeowners insurance would cover damages up to the policy limit but, anything in excess of policy limits, she would be personally liable. This doesn't affect her concept of selling jewelry - it should be taken into consideration when inviting people to your home for business purposes.

                                                She may be best served by obtaining an umbrella policy covering her home, business and personal assets. You can obtain a $1,000,000 policy for a reasonable amount of money these days. Although it seems ridiculously high, I can tell you that in today's society you can't have enough.

                                                I've been a paralegal for over 25 years and have seen quite a bit in my experiences. You can't take enough precautions these days.

                                                Good Luck!
                                                Valerie Nowottnick
                                                Paralegal Consultants
                                                www.paralegalconsult.com