December 16, 2010

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Question:

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Ken:

    I am sure that you have answered this question a thousand times but the way your contracts are written is there any real advantage what type of company structure you have for liability purposes if you have no employees? if employees are a consideration then a LLC or other corporate structure is necessary correct?

David Dunwoody

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Answer:

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    No matter how strong the contracts are that protect you, and no matter how much Errors and Omissions Insurance you carry, you should not be doing any alarm or security business in your own name.  There is no reason to expose yourself to personal liability for all aspects of your business.  Keep in mind that liability generally attaches for either contract or tort.  If you create a business entity you will not be personally liable for contract debt, unless you personally guarantee that debt.  You will remain liable for negligence you commit, but not negligence committed by other employees of the business entity.  Additionally business entities generally afford certain tax advantages.

    There is not a single reason to conduct business in your own name.  Even one job is too many.

    Business entities fall into different categories, but the most common are corporations and limited liability companies.  Accountants seem to favor the LLCs.  I don't.  They are more costly to form.  Easier to form a corporation; then elect sub chapter S status.  That will give you the same pass through income as a partnership and LLC so you won't have double taxation.

    Even if you're a one man show and you are forced to personally guarantee your trade debt and other contractual obligations, you're better off doing business through a created entity.  If there is a loss and lawsuit, more than likely only the business entity will be sued, not you.

    Once you do create the business entity make sure you use it; don't ignore it - because if you do then expect others - meaning your creditors and those suing you - to ignore it.  Make sure the business entity name is on your cards, contracts, letterhead and other paperwork that the public sees.