Disclaimer: You cannot rely on this blog as legal advice. I am not a lawyer. Ultimately it is your decision on how to legally organize your company. You should speak with a lawyer if you have specific questions.
Congrats! You’re starting a business! You’re excited about what you’re going to offer. You know what your customers want. You dreamed up a snazzy name. You’ve found a prime location. You ready to go!
Before you start selling, please pause for a moment.
Businesses must follow hundreds of laws, even before they open. You need to create the company legally and get all the proper permits and tax registrations. It’s a thorny process. Unless you are a serial entrepreneur, you probably don’t know the scores of steps.
Now is when I meet many startups. They are unsure if they have tax or legal questions, and the answer is it’s both. I can guide you through the process, point out pitfalls, and help with the paperwork.
Please note, I am not a lawyer. I do not offer legal advice. If you have legal questions and need a lawyer, consider my friend Ben of Lambert Worldwide. No affiliation – he’s impressive and answers all my questions!
Forms of Business
The very first step in creating a business is to decide how to register it with the state’s Secretary of State. You have options on how to form the company, like a Limited Liability Company (LLC), corporation, partnership, and more.
You could skip this step and go the shorter route and get a Doing Business As (DBA). It seems clean-cut and there are little to no annual fees.
Not to burst your bubble, but I do not recommend a DBA. I recommend organizing as an LLC. Why? Because of the risk.
An LLC creates a legal “person” separate from you. In the eyes of the law, you are two beings. If the LLC does something wrong, you are not personally liable (unless there’s fraud). If your business is taken to court, the most you can lose is your investment. The lawsuit cannot touch everything else you have. If you only had a DBA in the same situation, you could lose literally everything you have.
People often hesitate to form an LLC because there’s an annual fee. Each state chooses its requirements and fees. In Connecticut, you’ll pay $20. But in California, you’ll pay $800! When the price tag is so high, it’s understandable why you’d want to avoid it. Nevertheless, I insist on forming a separate legal entity.
Let’s first consider what all is at stake and afterward, reasons why you could get sued.
You may want to form an LLC if you:
- Own a home
- Have kids
- Have a spouse
- Have a retirement fund
- Your spouse has a retirement fund
- Own a vehicle
- Expect future income – from working, gifts, inheritances, lottery, or any other source
- Possess anything that you want to keep forever
If you have a DBA, get sued, lose, and the other party wins a hefty judgment, you could lose everything on that list. They can force you to sell everything you own to pay up.
Technically, if you have a spouse or young kids, their property is yours too. That means everything they have is at risk.
Insurance is not an apt substitute either. The policy will cover up to a set amount (if anything). Any judgment above that amount will be paid by your business assets first and your personal assets next.
Now if you have an LLC in the same situation, all your personal assets, like your house and retirement savings, cannot be touched if your business gets sued. The other party can’t compel you to sell your home.
The most you’d lose is your business and whatever you invested in it. While that would be devastating, it’s not nearly as hard as losing everything you’ve worked for over your entire life. You can bounce back and start a new business.
Now that you understand what’s at stake, let’s discuss some scenarios why you could get sued.
Someone Could Sue Your Business If:
- You get in an accident while driving to a client meeting
- A person falls and injures themselves in your store
- A person falls and injures themselves while in your office
- A customer gets sick after using or eating your product
- An employee claims a customer harassed them
A long time ago, my Mom walked out of a gas station, tripped, and landed on cold, hard pavement. Her glasses cut up her face. She had deep violet bruises on the right side of her face. She scraped hands and sprained a wrist.
There was a little lip on the doorway, and she caught her foot. Thankfully, she didn’t get glass in her eyes!
Honestly, I don’t remember if Mom had a lawyer. The store owner paid for her medical costs and fixed the door. She could have sued him for negligence, pain and suffering, and probably a few other things.
I cannot stress enough how much you’re gambling if you don’t separate your business from yourself.
That gas station owner did not expect my rushed, clumsy Mom. Nonetheless, it was his door, his business, and his responsibility.
I want to keep what I have, so KIS Accounting is an LLC. My company or belongings are not a gamble. I lean towards overdoing it on legal protections (and starting a relationship with a lawyer). Instead, I focus on my work without that nagging worry.
Since I help many businesses get started, contact me if you need guidance. The requirements are complex, and it will cost you many hours to DIY it. I provide a simple process that encompasses the essentials.
Starting a business should be an exciting time. Keep the party going by not risking everything you’ve worked so hard to build. You will hit stumbling blocks, hopefully not ones that get you sued. Give yourself the ability to bounce back, in case it does happen to you.