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200911 Washington DC Supreme Court
So, why form an LLC?

At the end of last year, I spent a couple of weeks trying to decide whether or not to move MasonWorld.com from a Sole Proprietorship to a Limited Liability Company. So, I thought it was appropriate to make a blog post describing my findings while researching this topic. I thought it might save you some time in the future.

In the end, I did form an LLC and I used LegalZoom to do it — but I did not do it for the reasons that you might think.

Having said that, I need to let you know that I’m not an attorney, and in fact I don’t even play one on TV. If you need legal advice, you definitely need to consult an attorney. Don’t do anything based on my opinion. You need to seek professional advice for legal matters and for tax accounting, for that matter.  Also, you should know that LLC laws vary from state to state (and from country to country).  So, you really need to talk to your attorney.

Even though I am not an attorney, I do think it’s useful to understand what kind of questions to ask an attorney. After all, attorneys cost $150, $200, or $250 an hour. It pays to know what you need to ask about before you go in to ask advice from an attorney. There’s no reason to get a background education from an attorney. You need to go in with an education and then leverage that education to get your tasks accomplished as quickly as possible for the lowest attorney fees possible .

Why Form An LLC (Myths Revealed)

I was considering moving the Mason World activity to a Limited Liability Company (LLC) for three basic reasons. I think these are the three basic reasons that most people consider using a Limited Liability Company for.

One, limit liability. Very clearly, if I get sued for something that I do on MasonWorld.com or one of my other websites, I’d like to keep someone from taking my life savings, my house, and my car.  I want to limit my personal liability.  As you can see, the general theme of protection” is the major selling proposition in the ad creative from LegalZoom below:

Two, tax protection. Everybody always says that the right thing to do is to form a Limited Liability Company under tax code sub chapter S. One of the things I wanted to determine was whether or not this would give me any tax savings.

Three, appearances. Hey, it looks cool to have a Limited Liability Company moniker behind the name of your company. So, forming an LLC might give you some additional credibility.

Now, I’m not really going to talk about my tax findings and this issue of credibility in this blog post. We’ll save that for a future blog post. But, I will tell you about my findings on the liability side. I had a long discussion with Lynn Terry in her Private Member forum, which as you know I participate in very heavily. I’ve come to some very definite conclusions after talking to a couple of attorneys, and they may surprise you.

An LLC May Not Protect You From Anything

If you are a Solo Entrepreneur, liability protection is not a good reason to form a Limited Liability Company according to my research.  Again, I am no attorney (you should consult one to confirm my research).  However, consider for a second what you want to be protected from. Limited Liability Companies protect you from the liability of debt, among other things. They separate your business activities from your personal activities and give you the opportunity to be protected against business debts that you may incur.

Now, I’m not borrowing hundreds of thousands of dollars to run MasonWorld.com. As you know, one of the great things about internet business is that it costs very little to run one. In fact, I run MasonWorld.com completely on a cash flow positive basis.

So, what I am really interested in is liability protection. If I write something on my blog that insults someone, and they decide to sue me and they win, then those damages could effect my personal assets. Assets that are not in any way related to assets generated by MasonWorld.com. The question is “can a Limited Liability Company protect those assets?”  Will someone who sues me be able to take my home and my car?

My research suggests that in the case of a Limited Liability Company with a single employee, the answer is absolutely not –– the LLC will not protect you. The reason is very simple.   When someone sues a company, they also sue the people in the company that are responsible for actually doing the thing that has caused the suit.  If the company contains only one employee then that employee will always be named in a lawsuit.  In the case of MasonWorld.com, I am the only employee.  There are many virtual assistants, but I am the only employee.  So, any action taken by MasonWorld.com that harms someone would actually be an action taken by me — so I would be named in a suit.

Of course, if you have employees or a partner then everything changes.  If your partner goes postal and creates liability for the company, a LLC may very well limit your personal liability.  Again, consult your attorney.

An Example Helps Make This More Clear

Consider the example of Bob123Website.com, which is run by Bob.  Note that Bob is not a real person — so if your name is Bob, please don’t sue me.  🙂

Bob writes a blog post and says that a congressman is sleeping with his secretary. It turns out that defames the congressman, and the congressman sues for liable, slander, or defamation, whichever one applies, in this case defamation. Let’s say the congressman wins, Bob loses, and Bob now owes the congressman $250,000.

But wait — Bob’s got an LLC.   It won’t matter because the congressman sued both the LLC as the company who took the action, and Bob as the individual who took the action.  With Solo Entrepreneurs this is almost always true — Bob takes every action at his LLC because he is the only employee.

Where a Limited Liability Company would protect Bob would be if Bob had seven employees, and employee number five was the one who wrote the blog post. That would protect Bob’s personal assets, because Bob would argue it was the company that did it, not Bob.

So, if you can’t separate yourself from your company (if you’re really a single person inside a company and you’re taking all the actions on behalf of the company) there’s really no way for you to protect yourself from liability. Again, this is my opinion and I am not an attorney — but this is pretty clear.

Bottom Line:  You are responsible for your own actions. You cannot hide behind a company name.  After all, shouldn’t it be that way? Shouldn’t you be responsible for your actions? That makes sense to me.

I did go ahead and form MasonWorld Enterprises LLC at LegalZoom — but not for liability protection.  I did it for several other reasons that I may discuss in detail in a future blog post.  I even had a new logo designed.

By the way — I loved LegalZoom.  I felt like they did a great job and made things really easy.

I’d love to discuss this matter further. If you’d like, please leave a comment at the end of this blog post and we can talk about this as much as you want, as long as you understand that I’m not an attorney, my advice may not apply to you, and you need to seek qualified legal advice before you take any legal action.

Thanks, and have a fantastic day.

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