What is the best way to safe guard your personal assets from a law suite, when you are in business for yourself, is it an LLC an S corp. or is there somthing else?
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An LLC is a limited liability company, and therefore the owner has limited liability and protection. Same with an S-Corp which is just a corporation with a certain type of tax treatment election. LLCs have replaced S-Corps for the most part (but not completely). Problem is you have to keep up the formalities and treat the company like the legal person it is. I used to tell clients that signing the articles of incorporation ( LLC papers) was like being around for the conception of a child -- the fun part. The hard work came later in keeping it alive through birth and growth. My bottom line advise -- get a big insurance policy and keep it paid up.
Thanks for the explanation and advice but as for $$$$$$$$$$$$$$ insurance policy i would have to live on a park bench in Central Park. My thinking is that if no one had insurance and plaintiffs had to pay court costs and lost wages to the defendant when they lose the case there would be a lot less law -suits and thats a good thing. But what do i know is in it how Senator Edwards made his $$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$.I think he went after the medical institutions who have $$$$$$$$$$$$$$$$$$$$$$$$ insurance policy.
There's nothing that will really protect you from lawsuits. Once one avenue is exhausted they'll just try another.
But if we could find a way of getting rid of 90% of attorneys...........
Paul
Edited 9/26/2007 10:47 pm ET by colebearanimals
Edited 9/26/2007 10:48 pm ET by colebearanimals
As someone else said:
It's the 99% of the lawyers who give the rest a bad name! <grin>
A bad day woodworking is better than a good day working -- yes, I'm retired!
Q: What do you call 1,000 lawyers at the bottom of the river in concrete overshoes?
A: A damned good start.There is the old story about in a small town, the only lawyer will starve, if you have two, they will both prosper.You said:
But if we could find a way of getting rid of 90% of attorneys...........
As a former SCORE counselor, I would recommend an LLC. It will cost you about $800 to have it properly organized by an atty. An LLC is a great deal more flexible than an S corp - or a true corp - if you ever decide to add employees and compensate them with an interest in your business.
I have not found it difficult to maintain one. Just an annual filing fee of $15. Both dollar estimates are based on MIchigan.
Good luck.
Frosty
"I sometimes think we consider the good fortune of the early bird and overlook the bad fortune of the early worm." FDR - 1922
It's not just paying the filing fees that is needed to maintain the corporation. In bankruptcy all the transactions of the entities will be examined. If the business isn't operated separately, observing the formalities of the corporation, particularly with respect to transfer of funds and use of assets, with sufficient documentation the court may well ignore the corporate form. In addition, small corporations may find that lenders will require personal guarantees or liens on personal assets anyway.
It's not just paying the filing fees that is needed to maintain the corporation. In bankruptcy all the transactions of the entities will be examined. If the business isn't operated separately, observing the formalities of the corporation, particularly with respect to transfer of funds and use of assets, with sufficient documentation the court may well ignore the corporate form. In addition, small corporations may find that lenders will require personal guarantees or liens on personal assets anyway.
You are 100% correct. I often represent bankruptcy trustees and recover funds for creditors from individuals who incorporated, but used company $ for taking the wife on vacation, personal vehicles, etc. The corporate (or LLC) form is fine so long as people realize that the corp.'s money belongs to the corp. and not the individual.
If the OP can't afford a decent liability policy, he shouldn't be in business for himself. It is an ordinary cost of doing business, like tools, a truck, etc. If necessary, take a policy with a big deductible.
Organizational legal liability must be recognized in context. If you are driving the business owned truck, you are individually liable as the driver, and the business is liable as the owner. You can also be held individually liable for failure to adequately supervise and employee.
The amount of insurance you need is proportional to your net worth. If you have less than a $100,000 then typically $500,000 of liability is more than adequate. If you have $10,000,000 in net worth, then there is no such thing as enough liability insurance.
As a small business, regardless of organization type, you may still invoke personal liability in though you may be incorporated, be it "C" or "S". The reason for this is that you may need to sign personally to incur debt or to purchase on open accounts from vendors.
The best advice is that advice you will receive from an accountant and a lawyer. Do not depend upon advice from friends, family or even this forum, unless those who are giving the advice have the qualifications to do so! Money spent to the proper professional will pay you dividends many times over, provided you are prepared to ask the right questions and be part of the conversation.
You are getting some good info here, and I'll try to add something. I have my farm set up as an LLC. I have three partners, and we are all equal owners. It is a big business to me, 4 to 5 mil a year gross, and you REALLY need to keep the books in order.
I do the accounting myself, but I also have an accountant to check what I do, and two attorneys that get paid pretty regularly.
It's no more complicated to have a LLC than not, just EVERYTHING needs to be operated within the business structure. Capital accounts are for owners draws, and all draws need to run through the correct accounts. The same diligence is required with everything else as well. Nothing that a well run business dosen't already do though.
High value insurance is really not as expensive as you might think, and as one of the other guys said, its just a cost of doing business.
Your original question was what protected your personal assets in the event of a lawsuit, keep in mind that your capital account is your equity in your business, and if you loose a lawsuit your equity may decrease. Personally, my equity in my business is my major asset, so I protect it with rather large insurance policies.
A lawyer can be your best friend in business if you find a good one. They are usually worth every penny they charge. I highly recommend getting good professional advice, as every business is different. It's worth the time and money.
Protection from lawsuit is not what LLC, Inc or other corporation plans are for. They protect personal assets from lean, or liquidation due to business failure and defaulting on loans or lines of credit. Even then it is only if you didn't specifically put those assets up as collateral.
If you or one of your employees burns down a house, runs over a child, damages a clients property or any other "mistake" the person in charge is responsible. That is what insurance is for. No form of incorperation will protect you from general liability.
Unless you have extensive lines of credit, loans on machinery, and certain types of payroll obligations to employees there is no benifit to incorperating. And there are several down sides. You need to talk to a lawer or business councellor.
Pardon my spelling,
Mike
Make sure that your next project is beyond your skill and requires tools you don't have. You won't regret it.
Make sure you can even set your business up as an LLC. In CA, if you have a professional license (GC, PE, etc), you can't operate as a LLC.
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