Why Even Worry About It?
You put a lot of time, money and sweat into your business. After years of effort, you have it fine-tuned and are making a nice living. How willing are you to lose your business?
Consider the following hypothetical situation involving two sole proprietors. Our first party, Programmer, creates computer programs for managing websites. The second party is Mark, the owner of a site that provides small businesses with websites. Programmer and Mark come to the conclusion that they can make big money by opening a joint site. This type of situation occurs every day on the Internet. How should they do it?
The best option is to form a corporation or LLC. Each party will own an agreed upon percentage of the company. Mark will contribute his marketing ability while Programmer contributes software platforms. The bylaws [administrative rules] of the corporation will detail how profits are divided as well as detailing who gets what [domain name, client list] if the relationship doesn’t work out. If a corporation or LLC is not formed, each party exposes their individual businesses to liability just as would occur in a general partnership.
What has been accomplished? Mark and Programmer are protected from liability arising from the new business. If the company fails or is sued because of problems with the software, Mark and Programmer will avoid personal liability and their original businesses are not touched. Are they completely protected? NO!
Mark and Programmer are still open to liability on the "back end". Without realizing it, each trusts the other to properly run their independent businesses. Why is this?
Assume that Mark and Programmer follow the above plan and the business is very profitable. One day, Programmer is served with a lawsuit claiming that he violated copyright laws with a program that he developed before meeting Mark. The nine companies to which he sold the program also sue him. The trial goes badly and Programmer is found liable to the tune of $750,000.
Guess what happens next? Since he is a sole proprietor, Programmer's interest in the joint business with Mark is seized to satisfy the judgment. Alternatively, he files personal bankruptcy. Either way, Mark is involuntarily going to have a new business partner that probably can’t program! In short, we are talking about a disaster.
How To Protect Yourself
Business entities are the key to limiting your exposure to liability. In the above situation, Mark and Programmer should own the joint company as individuals, but they should form business entities for their personal businesses. If the personal businesses are sued, their individual ownership of the joint venture entity is shielded from attachment.
As a general rule, you should form an individual business entity for each business you own. By doing so, you are better able to limit the potential damage of a lawsuit involving one of the businesses.
Got a Question? Ask.
Ask the community a question about this article:
Frequently Asked Questions
Tom Anderson's fake age
By: pleo | 24-10-2007
Do you think that if it will turn our that Tom Anderson's age is indeed fake, MySpace would be affected?
Will hulu be available outside the USA?
By: fpl | 23-10-2007
Will hulu be available outside the USA?
Google Talk Hiccups?
By: boots | 21-10-2007
I use Google Talk every day at work and at home for over a year now and in the last few days it happened to me twice that I message I sent or a message that was sent to me didn't arrive. Did anyone else experience this recently?
Migrating from Explorer to Flock
By: Wings | 21-10-2007
I just read about the new version of the flock browser. Is it easy to migrate to it from Internet Explorer?
Social Networking Sites - what do you think?
By: Tomer | 20-10-2007
What do you think about the SNS (Social Networkign Sites) such as MySpace, FaceBook, Bebo, Orkut and such?Don't you think they get repetative and boring after a while? I mean, what more would you like to see in Social Networking sites? Do you find them comfy to use? Too simple, too complex? Please share your opinions! :)
Flock to Support More Social Networks?
By: qualcosa | 19-10-2007
I really like Flock?s new support of Facebook. Will it be able to connect to other social networks as well in the future?
Q&A Powered by:
Latest Online Business Articles
Explode Your Income With Membership Sites
By: Resale Rights | 12/10/2008
Membership sites have been exploding through-out the internet in the year 2008 and Steven Lam has discovered a hot tips on how to go about it.
You are a click away to read an article that will give you some insight on how to create
that very first membership site with master resell rights
Marketing Specifics: Service Based Marketing
By: Janice Jenkins | 12/10/2008
company strengths along with pitfalls to watch out for
Learn to Make Money Online
By: Sandy Klocinski | 12/10/2008
One of the biggest problems entrepreneurs face when they begin learning how to do business online is 'information overload' - in fact I'd go so far to say that's it's an epidemic.
You Know That Your Product or Services are the Best in Its Domain!
By: mandeepmansa | 12/10/2008
The most difficult aspect of any business is perhaps sales. You know that your product or services are the best in its domain. You also know that you are offering it in good prices and it can solve the problems of its users.
How to Make Money With Affiliate Programs
By: John Marc | 11/10/2008
If you are looking for a way to make money online through an e-business, affiliate programs might be a great option for you. What exactly is an affiliate program? An affiliate program is simply a way for a business to sell a product or service. Affiliates sign up to market items through websites and e-stores. Affiliate programs are a great way for business to expand their consumer base and sales revenue and a great way for individuals to earn money online.
How to Get Paid to Answer Surveys
By: Dmitri Dalla-Riva | 11/10/2008
We detail how to answer surveys, which includes finding a legit site, seeing if it pays and also how and where paid surveys are. We also provide you with a site link too.
Bailout Dramas Generate More Stock Market Black Mondays
By: Mike Wright | 11/10/2008
Another dramatic weekend saw four banks receive government bail outs, not to mention the further file sales and mergers.
The Golden Rule
By: Keith McGregor | 11/10/2008
Buy Gold When Interest Rates and Inflation Signal a Golden Opportunity.
History has shown that the most powerful safeguard during times of crisis and financial uncertainty is to buy physical gold. The rapid increase in inflation along with slow moving interest rates makes this the best time to buy gold. Owning gold is one of the best ways to hedge against inflation costs that can cut profits and spending power. More importantly how safe is your money in the bank and how do you protect your weal
More from SD Lawyer
Selling Corporate Shares – be Careful
By: SD Lawyer | 22/10/2007 | Business
One of the touted advantages of owning a corporation is the ease in transferring shares. In many cases, this assumed benefit is simply wrong.
Should you Start a Business With a Friend?
By: SD Lawyer | 22/10/2007 | Business
Starting a business is a scary and exciting time. It takes a leap of faith, but also offers up the hope of successfully doing something you love. Still, there are things to be wary of.
Checklist for Going Into Business for yourself
By: SD Lawyer | 22/10/2007 | Business
If you are considering going into business for yourself, it makes absolute sense to be as prepared as possible. Here is a checklist of things you need to consider.
Avoid Common Business Start-up Mistakes
By: SD Lawyer | 22/10/2007 | Business
If you are considering starting up a business, you are facing both an exciting and stressful time. To succeed, you should avoid the common mistakes many new business owners make.
A Key Step for New Business Owners
By: SD Lawyer | 22/10/2007 | Business
Many a guru has opined on the keys to business success. While everyone has an opinion, I am going to focus on a more practical step you can take that will make a big difference.
What are Professional Corporations?
By: SD Lawyer | 22/10/2007 | Business
Many professionals are barred from forming limited liability companies or basic corporations for their practices. Instead, there only option is often to form a professional corporation.
Free and Low Cost Pc Offers – the Catch
By: SD Lawyer | 22/10/2007 | Computers
You've probably seen the ads for "low cost" PC's - "PC's for $199" - or even "free" computers. If you're in the market for a personal computer, you should know "free" doesn't always mean free. Very often, certain conditions and restrictions found in the fine print of advertisements for "free" or "low cost" PC's can turn a so-called deal into an expensive purchase.
Resolve Disputes With your Partners Before They Happen
By: SD Lawyer | 22/10/2007 | Management
A majority of businesses have ownership groups of less than five individuals. While this provides for efficient and effective management, difficulties arise when something happens to one of the owners.
Business 
