The Importance of having a corporation or LLC

Most often, small businesses start out with the owner hanging a shingle and offering their goods or services to the public. While this seems a cost-effective way to get into business, it carries significant risks that you may not be aware of. The law categorizes this type of business as a "sole proprietorship," or if there are multiple owners, a "general partnership." Attorneys call these "naked" businesses.

Businesses are legally exposed to a number of risks, for example, when you are unable to fulfill the terms of a contract, or when a customer makes a claim against the business for a personal injury sustained on the premises (e.g., slip-and-fall injury), or a civil penalty for a regulatory violation. If your business is a sole proprietorship or partnership, then the owner(s) of the business can be held personally liable for the damages or fines. That means that if a court judgment is entered against the business, the personal assets and income of the owners can be attached by the court to cover the damages. So, a successful plaintiff can go after your own assets, including your bank accounts, your real estate, and personal property such as investment accounts, coin collections, valuable art and antiques, and even your automobiles. The plaintiff can also attach your personal income, up to 25% or your monthly gross, every month until the judgment is satisfied.

The way to avoid this personal liability is to operate your business under an "entity." You can file a corporation or an LLC ("limited liability company") with the Secretary of State, and transfer the business assets into the entity. Under Nevada law, a corporation or LLC is considered a legal "person," such that contractors and customers are not considered to be doing business with the owners or managers of the entity, but with the entity itself. That means that if a claim is asserted against the business, any recovery by the claimant is limited to the assets of the entity. Even after a successful lawsuit, the plaintiff cannot recover from your personal assets or income, but is limited to what the entity owns. While obviously no one wants to lose a lawsuit, if your business is clothed in a corporation or LLC your personal assets and income at least are safe from levy.

If you are operating a "naked" business, that is, one in which you personally are the operator of the business, contact us for information on how to shift the business to an entity in order to protect your personal assets.