Wow... there is a lot of speculation going on here regarding the best choice
of legal entity for organization of a business. The answer is: there is no
simple answer.  I owned an ISP and now I'm a lawyer. During law school I
concentrated a fair amount of my coursework on business planning and
business organizations.  There was one underlying rule that we were told
always to follow:


That being said, does that mean that you want to create a C-Corporation or
an S-Corporation?  Not necessarily.  There are many forms of business that
limit the liability of the owners/investors.  For instance: you can choose
from C-Corps, S-Corps, Limited Liability Company, Limited Liability
Partnership, Limited Partnership, and Limited Liability Limited Partnership.
Each of these forms has certain liability advantages and certain tax
advantages.  Some of these forms are available in all states and some are
restricted in use and only available in certain states.  Additionally, there
can be certain advantages to being incorporated under one state's laws
versus being incorporated under your home state's laws.

The two forms of business organization that make little if any sense for any
business in this day and age are: the general partnership and the sole
proprietorship.  Take this simple example as to WHY you need to not be a
general partnership or sole proprietorship:

Hypothetical Scenario:
You own a Wireless ISP business.  You are the sole owner.  You are set up as
a sole proprietorship.  You have one employee who sits at the desk all day
long and answers sales calls and does technical support.  You do all of the
outside work and you always have happy customers.  One day you leave from
the shop and drive five miles to a customer's site.  You are in the middle
of installing a tripod on the customer's roof and you realize that you've
forgotten your last tube of roofing caulk back at the office.  You call your
trusty employee and ask them to drive and bring you the tube of caulk.  Your
employee gets in his personal car and starts to drive out to the site.  On
the way out, he is negligent and crashes into another car killing the driver
and causing permanent injuries to the passenger.  You have no insurance on
your employees' car and he carries the state minimum in liability insurance.

The driver's family sues your employee, your company, your company's
insurance and YOU PERSONALLY.  The case goes to JURY TRIAL.  Your insurance
company quickly gets out of the lawsuit because your employee was listed as
a desk worker and was outside of the scope of the coverage.  The Jury finds
that your employee, your company and you personally are liable joint &
severally for $2,000,000 for the wrongful death of the driver and $1,000,000
for the loss of consortium for the family and $2,000,000 for the hedonic
damages for the loss of enjoyment of life for the passenger that was
permanently disabled and $2,000,000 for life time medical care of the
passenger and $500,000 for future lost wages of the passenger.  So, you are
in for $7.5MM because your employee crashed his car on the way to drop off a
$2.00 tube of caulk!!

Now... how would this differ if you were for example a limited liability
company (assuming that you followed the organization formalities to make the
company a proper legal entity)?  

The court would still find all the same liability BUT you as an individual
owner would not be liable for the negligence of your employee.  That means
that it is likely that the crash would still bankrupt your company.
However, you as an individual could keep your car, your house, your personal
investments, cash, stock, pension, etc. and you could avoid a personal

So..... this may seem extreme and unlikely, but you need to consider whether
it is worth an investment of $1000 or $2000 to shield yourself from the
unlimited liability that you face as a general partner or sole proprietor.

Larry Yunker

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