Sole proprietorship. what about liability?
It breaks my heart when I see one of the students in my online classes stuck in neutral on a great business idea. Oftentimes their spirit gets broken and they move into a state of perpetual procrastination over the issue of what type of business entity they should form.Most new entrepreneurs fret needlessly over this issue. For almost all of you the most intelligent business organization is the sole proprietorship. You don’t need to file anything with anybody, you simply do business using your own 1040 form at income tax time at the end of the year.Your Social Security number is your tax ID.But whenever I recommend this procedure I’m often asked “What about the liability issues on a sole proprietorship”?Yes, liability issues are there, but there is a very simple method of protecting yourself even better than a corporation or LLC. It’s just a simple call to your insurance man. Order an umbrella liability insurance policy. (Every business should have won anyway) This policy should come into play, if and when you’re ever faced with liability issues over your new business. Let’s face it in the first year most often we’re not doing enough business to have much exposure from liability standpoint anyway. Here is a response I wrote recently on the classroom discussion board about why a corporation may not provide you with as much protection as most believe. .
|
“ |
As for the liability issue the corporation does give you some liability protections that a sole prop does not. But every entrepreneur no matter what should have a personal liability umbrella insurance policy. Don’t believe all you hear about relying on a corporation to protect you against liabilities. The corporate veil can bIn moments the corporate veil has been piercede easily pierced.In a former life I owned a company called Judgment Recovery. Its function was to collect judgments. It is a very simple matter to appear before a judge and tell the judge that the principals are about to abscond with the assets to thwart creditors. In moments the corporate veil has been pierced. Within hours we were towing away the car. As for lawsuits, it is a little tougher to pierce the corporate veil, but it is done everyday. If a customer slips and falls while entering your business. The attorneys will sue the corporation, you personally, the landlord, the manufacturer of the door, the carpet mill that made the carpet and anyone who lives in that zip code. The judge usually dismisses everybody but the corporation and you personally. Judges are more and more willing to hold officers of closely held corporations personally liable (especially if you have personally guaranteed other corporate debts). If and when they win the lawsuit your liability insurance should kick in and pay the settlement.For further reading try: http://www.professorbainbridge.com/2004/04/abolishing_llc_.html |
,, |
Got a question, war story or comment about this topic? Click on the “Leave Your Comments” link at the very bottom of this article. Some of my best ideas for future articles come from reading reader comments. I’d love to hear from you! Technorati Tags: starting a home based business, buying a business
| Related Articles |
What organizational structure for a home based business? A Guide to Starting Your Business Fictitious business name, assumed name, DBA
Save this page to: del.icio.us - Digg it - Yahoo MyWeb
