Being a business owner certainly has its perks. You can set your own hours, make more money based on more work, and take all the credit for growth and success. However, as most business owners know, there is a price for autonomy. That price includes not only self-employment taxes (which I loathe) but the potential for exposure to liability. The downside for getting all the credit is you have all the responsibility when things go wrong. Even honest mistakes can create substantial liability. If you are a sole proprietor, then there is no distinction between you and your business. Any personal assets could be at risk for business liability.
For example, suppose you do landscaping as your business. Someone on your crew mows a yard and the lawnmower spits out a rock which strikes a vehicle parked along the curb. Suppose the rock was visible and avoidable, but the crew person was listening to Metallica on headphones and didn’t notice. The rock is big enough that it shatters the car’s windshield and glass flies everywhere. Someone is in the car and the glass cuts his/her skin causing serious injuries. Oh, and for good measure, the car is an Aston Martin. It may seem like something only from fiction, but this stuff really happens. You would probably be liable because the crew person was working for you and the injury occurred from normal business activities. You could face hundreds of thousands of dollars in liability.
If you don’t have an LLC or a corporation, your personal assets could be sold to satisfy your liability. This is because there is no legal distinction between you individually and your business. Your house, car, bank accounts and many other assets could be seized by the sheriff and sold at auction. Creating an LLC or corporation will provide what we often refer to as a “corporate shield.” It doesn’t block everything, but it’s a whole lot better than running around with no protection.
These business entities are treated like another person in the eyes of the law. Most types of liability will extend to the business only. If you are the landscaper, you would have contracts designating your LLC/corporation as the contracting party in your place. Then when something like the example above happens, only the business assets will be available to pay a judgment. Obviously that would still be bad, but not as bad as losing your house.
Now some of you might be thinking, “wouldn’t insurance give enough protection?” From what I’ve seen, most liability insurance for contractors or similar vocations won’t cover damages from negligence unless it’s property damage. So in the scenario above, only the car would be covered. The car might not be the most expensive part of the damage, or even if the injuries are only $100,000 while the car is $300,000, that’s still enough to ruin most people. Most liability insurance won’t cover breach of contract damages at all.
I usually recommend an LLC for most business owners, especially small businesses. A lot of small business owners are good at what they do, but not so good at business details. They might bake delicious cakes, but do a terrible job of keeping records, making reports, filing papers etc. While there is some hassle involved in managing any business, managing an LLC is typically less complicated than a corporation for small businesses.
Contact me today for a consultation on creating an LLC.