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Discussion in 'Small Business Helper' started by The Helper, Sep 2, 2004.

  1. tsbhelper

    tsbhelper Small Business Helper Forum Moderator

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    Cognitor,

    "If it fails, they go after your stuff"...

    I'm not sure what planet your teacher is on.

    Forming a corporation involves extra expense on startup, accounting and legal fees. Additionally, corporate tax forms usually require the services of an accounting firm, on a regular basis. You are looking at several thousand dollars of extra startup expense, if you dot all the i's and cross all the t's.

    What you get for this is protection from liability you might incur, NOT PROTECTION FROM CREDITORS. Anybody in business who is going to let you use their money, or their services by leasing you equipment or an office, is smart enough to require you, as the owner of the corporation, to sign a personal guarantee of payment, which completely bypasses any protection that the corporation might afford you in avoiding debt. They know the tricks as well you do. Been there, done that, and YOU DON'T JUST GET TO WALK AWAY.

    Ok, they do go after your stuff... so what? If you are doing a small business startup, you have a certain amount of money that you will be putting at risk. If the business fails you are going to lose this money. This is the amount of string you have. When you reach that limit, you get out of that business, and admit you have failed. If you refuse to admit failure and continue on in spite of that, you are going to lose more than your business.

    You don't mortgage your future on startup. You plan carefully and leave yourself several back doors (exit points) which allow you to get out without losing your skin.

    If your business judgement is so bad that you can't do this, an S corporation is not going to help you.

    The Small Business Helper
     
  2. Cognitor

    Cognitor New Member

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    tbshelper,
    I had the feeling something was out of wack. I'll confront him with that on Monday; I'm interested to see how he responds.
     
  3. tsbhelper

    tsbhelper Small Business Helper Forum Moderator

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    Cognitor,

    Please keep in mind that the choice of the proper business structure for startup is dependent upon the risk of liability as well. What I have said about the decision making process which would cause you to select a DBA instead of an S type corporation is entirely dependent on your financial position.

    If you have a strong financial position (more than $100,000 in equity), starting up with a DBA is not a good idea. People who have money are targets for lawsuits. An S-type corporation gives you the necessary protection from this. In this situation you keep your startup funding separate from the corporation and strictly limit what assets the corporation owns. This way you protect your own personal assets and limit your liability to only what assets the corporation has.

    This type of corporation is an "operating shell", a protection from liability and expensive litigation. If somebody sues it, you just fold it and walk away. Then you do another startup with another shell corporation. This is probably what your teacher is talking about.

    The Small Business Helper
     
  4. Cognitor

    Cognitor New Member

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    tbshelper,
    Ok, correct me if I'm wrong but in lets say if one was to own and operate a supermarket, then it would most likely be wise to incorporate due to liability factors. On the other hand, if one was to open, say...an accounting firm or another type of service based business, then it would be wise to get a DBA? Generally speaking, what types of businesses are typically wise to incorporate (with a given that there is $100,000+ in equity) and which are not?
     
  5. tsbhelper

    tsbhelper Small Business Helper Forum Moderator

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    Cognitor,

    If you have enough personal equity ($100,000 or more), you are a target, no matter what type of business you select, or even if you are not in business at all. In this circumstance, you carry the maximum in liability insurance for your vehicles, and for your real estate holdings, especially if you personally own the property in which your business is located. A children's bicycle accident in the parking lot of your property can be disastrous for you, no matter what your corporate structure is, if you do not do this.

    Employees can also torpedo your business. A work related injury where there is any possibility of liability on your part can also take you down. Nowadays, RSI (repetitive stress injury) is a favorite. This means that somebody who works for you, sitting down in front of a computer screen and typing, can claim that they have injuries due to using their fingers too much... and sue you for it.

    Type of business is not relevant, all businesses have some risk of liability. The only circumstances where that you would not incorporate would be based on your financial position. Even a corporate business structure is not bulletproof, it can still be taken down, for whatever assets it does have.

    People who are starting up small businesses for the first time who do have sufficient equity to be at risk should never use a DBA type structure, regardless of what type of business they are starting. As I said before, if you have the equity (money) you incorporate to get the additional protection from liability.

    The Small Business Helper
     
  6. Cognitor

    Cognitor New Member

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    That clears things up. Very good to know.
     

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