Starting a business can be straight up overwhelming. Not only are you playing boss, but you have to worry about the finances, business growth, marketing, and not to mention all the legal mumbo jumbo that comes along with running a “legit” business. We want to make this simple. It doesn’t have to break an arm and a leg. This should be easy and guided. And that’s exactly why we have invited Christina Scalera to bring this incredible series to you. She is the attorney for creative entrepreneurs who aspire to have beautiful businesses from the inside and out.
As a creative, I have a soft spot in my heart for creative business owners just getting started. As a lawyer, I have a special pain in my side reserved for the times when someone brings up their sole proprietorship, DBA or partnership. It’s not that these three entities are inherently ‘bad,’ it’s just that there are such better options available now for almost no effort and a very low cost. Let’s take a little trek through each entity and find out why you might start looking into forming an LLC or other business entity.
You are a sole proprietorship, or sole prop, by default until you gain a partner or partners, or until you form some kind of LLC, C-Corp or other business entity. A sole proprietorship can grab a tax ID number and start deducting expenses just like an LLC and function fine for a long time. However, by failing to form some sort of corporate protection, you leave yourself open to personal liability. This is because there actually isn’t any separate business entity from you. So the financial and tortious liabilities of the business are YOURS and you are personally responsible.
“Whoa, what the heck Christina, what is tortious liability?? And why should I care?”
Tortious liability, or the law of torts, is the stuff you see on the side of buses. You know, the slip and fall cases, the “roof fell on my head” cases, the “bit into your cookie and broke my tooth” kind of stuff.
“Okay, I know what this so-called ‘tortious liability’ is, but why should I care? I have an online business.”
When you’re a sole prop, like I mentioned, you’re personally liable for any torts or debts of your company. This means that if you overspend on your company credit card, or your newsletter gets hacked and a subscriber sues you (tortious liability), whatever a court orders you to pay will be coming out of your own pockets. Why? Because there is no separation between your bank account and your business bank account. This means if your business messes up one day, you will end up footing the bill.
Let’s compare this to an LLC. Instead of suing you personally, a customer would sue your LLC and any payment to that customer would be coming out of your LLC’s bank account — not yours so long as you are running a legitimate LLC. Your business might go bust, but you won’t lose your house or car. In our live workshop (see below for more details), we’ll be talking more about what this means and how to protect your LLC once it’s formed.
A partnership is like a sole prop, but potentially more dangerous. You’re automatically considered a partnership by default if you are working with one or more other people. A partnership is even more dangerous than a sole prop because in a partnership, not only are you and the business one and the same, but you and your partners are one and the same too. This means if you have a partner who goes rogue and spends $20,000 on a credit card on business expenses, skips town and can never be found again, the credit card company will be coming after your house, your car and your kid’s college fund, not theirs. Why? Because they can. In a partnership, each partner is ‘jointly and severally liable,’ which is just a fancy way to say the law will treat the actions of your partner as if you did them yourself. So, for example, if your partner hits a pedestrian with his company car on the way to meet a client, the pedestrian could sue you, or the pedestrian could sue your partner but you could still be ordered to pay. This is because the law sees you and your partner as the same person as far as the partnership goes.
Another disadvantage of partnerships is that they end as soon as one partner leaves, becomes disabled or passes away. One easy fix to prevent this from happening, and avoid the personal liability discussed above, is to form an LLC. If a partner leaves an LLC, the LLC remains. Ownership can be assigned to someone new, transferred down generations or otherwise manipulated as partners come in and out of the LLC.
DBA (“Doing Business As”)
DBAs arose from an era when it was very difficult to incorporate and LLCs didn’t exist. Not only do you have to file paperwork to legally form your DBA, possibly even more than you need to file an LLC, you also open yourself up for unnecessary liability (are we seeing a trend yet?)
A DBA is formed when you start a company, say, Christina Scalera Enterprises Inc. Under this company, I might have a calligraphy business named “Loops and Hoops Calligraphy,” a dog-sitting business named “Woofs Dogwatching” and a photography business named, “Christina Lee Photography.” So, in this case, I have a company that is protecting my personal assets, but even that comes into question when we consider the point of state business registrations. States allow you to form businesses for a specific purpose, which you must specify upon formation. States aren’t going to let you setup your LLC for one business purpose, like calligraphy, then give you the legal protection of that LLC if they find out you’re actually running a construction company. In this situation, a court would probably just look at your construction company and say “nope, we’re treating you as if you never had an LLC, you’re personally on the hook for $X.”
Furthermore, if I were to get sued in my capacity as a dog-sitter from the above example, the plaintiff (the guy suing me) would get to collect any money he’s owed by the court from my Christina Scalera Enterprises Inc. company. That means if I have a wildly successful calligraphy business making millions of dollars a year, and he wins a big judgment, he could potentially shut down my calligraphy business and bankrupt it, even though he sued me as his dog-sitter.
Contrast this with a potentially more legally-savvy way to do business: I set up an LLC for each of my businesses. Most states charge about $100 to form an LLC and around $50 each year after for annual renewal. If I’d set up a separate LLC for my calligraphy, dog-sitting and photography businesses, someone could sue one of those companies, or I could rack up debt in one of those companies without having to worry about courts (or creditors) coming after my other LLCs or personal assets (provided each LLC actually is a legitimate business, which we’ll discuss in the webinar on April 7th).
For example, let’s say a photography client says I did a bad job and sues me for her money back. The assets of my calligraphy and dog-sitting businesses, as well as my personal assets, wouldn’t be up for grabs when it comes time to pay this upset photography client in court.
Each business owner is different with different scenarios, financial burdens and liabilities. It’s important to know there may be better options out there for you. I’m not saying an LLC is going to solve everyone’s problems, and I can’t make a blanket recommendation for the right kind of entity for every creative business owner. However, an LLC may be a better option if you’re looking for an increased level of protection from personal liability. Talk to a lawyer to see what kind of entity is right for your situation if you have concerns.
Feeling totally lost?
Not to worry. Over the next several weeks we will be doing a brand new FREE online workshop series - Legalize My Biz. Inside not only will you get access to Christina, but you will unlock a wealth of knowledge. We have three goals throughout this series:
- To provide valuable, easy-to-grasp legal information for free
- To provide solutions to help all creative entrepreneurs, no matter what season of business you’re in
- To always approach your concerns from a place of understanding and love as creatives ourselves.
Ready to get started?
Throughout the Legalize My Biz series we will have 3 FREE- 90 minute online workshops. Each will include 60 minutes of jam packed learning, followed by 30 minutes of question and answer time with our creative team. Here’s the incredible schedule (can only make one or the time doesn’t work for you? Make sure to save your seat and you will have exclusive access to the replays):
- Business Formation Basics - Thursday, April 7th
- Everything You Ever Need to Know About Contracts - Thursday, April 14th
- Protecting Your Intellectual Property (aka Trademarks and Copyrights 101) - Thursday, April 21st
Each webinar will be held Thursday at:
8 p.m. CST | 9 p.m. EST | 12 p.m. Aussie Time (Wednesday - time is crazy right?!)