Many people do business as themselves – as a sole proprietor – for many reasons. Some rationalize that they are not large enough to incorporate or do business as a limited liability company (“LLC”).
Over the years, I have had numerous clients and potential clients explain to me why they did not need to do business as an entity. Only a few really were “too small” – and that is because they really were not doing any business. For the rest of you, who are “really doing business,” you should be doing business as an entity.
As I explained last month in my “check up” article, doing business as an entity keeps your business assets (and risks) separate from your personal assets; and for those fortunate people who have more than one business. That you would want to keep your business assets and risk separate from your personal assets just seems to be good sense.
However, I also mentioned that entity also keeps the assets (and risks) of one business separate from another. An obvious example of two businesses with separate assets and risks is a marina and a restaurant. The marina has one set of assets and risks; and that restaurant has another set. Unless neither the marina nor the restaurant is doing any appreciable business –a very rare occurrence even in the worst of economic times – the marina assets and risks should be separated from those of the restaurant.
One very good reason (and there are many) a business owner should do business as an entity – at least in the State of California – is that if the owner has any employees (at least one), if an employee ever brings a Labor and Wage claim against his “employer,” if the “employer’ is an entity, only the entity – not the owner of the entity – is liable for the alleged claim. If the “employer” is an individual, the individual is liable for the claim – and the claim, if the employee succeeds, may not be dischargeable in bankruptcy.
Moreover, as at least California business owners should now understand, filing a lawsuit these days has become almost like a sport. Oddly, while personal injury lawsuits – long thought the kind of lawsuit that was overwhelming the courts – business lawsuits are becoming the most common lawsuit filed – and many of these are filed by one business against another! The idea that all business people are just one big happy family is severely undercut by the number of lawsuits business owners file against one another.
And now for the objections. Some business owners try to avoid doing business as an entity – or separating businesses into separate entities – by asserting that it is too expensive. It is not. Some lawyers set up entities for a flat fee – there is a reason for this – if the lawyer has done this a hundred times, he or she should know what they are doing by now – and should be pretty efficient at it, making the whole process not much more expensive that if you did it on line. The big difference is, of course, is that the lawyer should be able to do everything you need to be set up properly. Online, you are on your own, for the most part.
Some business owners also don’t like the formality – that the entity has a separate tax identification number; a separate tax return, bank account, etc. Well, that is the price of having your assets protected if there is a claim against the business. Moreover, it is exactly this “separateness” that protects your personal assets from such claims – the business assets and risks are completely separate from your personal assets – and the entity, its bank account, records, and tax returns make it clear that the business is separate from your personal assets.
Finally, some owners have actually told me that their CPA, accountant or bookkeeper told them not to incorporate from tax reasons – I have never actually met a CPA, accountant or bookkeeper who has told me this to my face. To the contrary, every CPA, accountant and bookkeeper I have ever met has strongly supported doing business as an entity – and usually has clear recommendations for the type of entity for each business.
Consequently, if you are doing business; and not doing business as an entity; there are lots of good reasons why you should begin doing business as an entity; and no really good reasons why you should not. Therefore, either go online and get some bare-bones entity file; or get to an attorney who knows what he or she is doing – usually doing such work for a flat fee is a surefire indicator this is not his or her first rodeo. If you need a referral to such an attorney, feel free to contact me at Mark@mdholmeslaw.com or call me at (949) 645-0450. Next month, we will talk about the next thing you need if you have one or more “partners” – a shareholder or “buy out” agreement.