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Should you operate your business as a corporation or limited liability company?

If you have either a customer, an employee, or a supplier, then you need to operate as a corporation or limited liability company. The idea is to keep your personal assets, retirement and other savings, and debts completely and legally separate from debts and economic risks of your business. Just the attorney's fees and expenses defending against a lawsuit by a customer or employee could cost you all the equity in your home and all your savings. So keep them separate.

You can't keep them all separate. Almost all landlords and lenders will require you to personally guaranty your company's lease or credit line. In many industries, there will be principal suppliers who will insist on receiving your personal guaranty. Franchisors, automobile manufacturers supplying their dealers with cars and replacement parts, the principal suppliers for grocery stores and restaurants, and liquor suppliers will all require that you guaranty their contracts and deliveries to your company. 

Resist giving such guaranties as much as you can, especially for small suppliers and suppliers with lots of competition, but be realistic, and don't let resisting keep you out of the business. Eventually, your company will have enough assets, enough cash flow, and enough history with the landlord, lender, or vendor that they will want your business enough and your company will be large enough that they will do business with your corporation or LLC without requiring your personal guaranty.

Being a corporation or LLC protects you and your personal assets against claims for alleged mistakes and failures by your company, but not for your own mistakes and failures. You're not liable for mistakes and wrongful conduct by your employees and partners or co-owners, but you are still liable for your own personal wrongful conduct. If an employee of the company injures someone in the course of his duties for the company, the company is liable to the victim, but the owners are not personally liable. If one of the owners causes such an injury, the company is liable, but not the other owners. However, if you or one of the other owners hurts someone in the course of doing the company's business, the business is liable, the owners not involved in the wrongful conduct are not liable, but any owner and any employee who actually participated in causing that injury will also be personally liable to the victim.

 Any business ought to carry general liability insurance. Setting up your business as a corporation or LLC will cost about $1000.00. No matter how small or simple your business is when it starts, the cost of keeping a separate set of financial records and preparing a separate set of tax returns will cost another $1000.00 - $2000.00. That's less than a second insurance policy and provides a solid wall of protection between your personal assets and your business.

 If you're operating a business, no matter how small, your goal is to grow that business and succeed. Grow that business as a corporation or LLC, so that you keep its debts, liabilities and risks separate from your personal assets and savings.

 

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