Ask HN: How do I best limit legal/regulatory overhead in the USA?
I have a business, I have customers. I would like to receive money for my services and report my income as is proper.
However I am very afraid about frivolous lawsuits and legal/regulatofy expenses that many C corps (and others) face in the USA.
What are my options for protecting myself and limiting expenses and risk?
Thanks!
4 comments
[ 5.3 ms ] story [ 23.4 ms ] threadHowever, depending on how much your company is making, if it is a LOT of money, you can structure your companies.
Corporations are legal fictions and given a limited legal personhood. That is why you can open up a bank account in the name of a corporation, but you can't open up a bank account the name of your chair that you're sitting on. The corporation has legal rights and responsibilities.
Each corporation is a separate legal person. So, there are many companies that will open up multiple corporations to defend their assets. For example, I know of someone who has a business in a high-liability industry. What he does is that one corporation owns all the real estate and automobiles and trucks. Another company owns all the fixtures and inventory. The third company, which is the actual business that is customer facing, owns nothing. Except for some money in the bank account, of course, to make miscellaneous purchases.
The customer-facing business then leases the space from the real estate company. It leases all the fixtures and inventory from the second company. And pays them both, just as if they are separate companies....which they are!!
So, if someone sues the customer-facing company, that is fine, they have nothing to sue for. There are no major assets in that corporation. So there might be $20,000 in it or something small amount like that. A person can't sue either of the other two companies, or, at least, it would be MUCH harder, and lawyers would probably would not work on contingency fees. He lives in a smallish city and all the lawyers know him and will not touch any case against him, unless the suing client pays up front. Because all the lawyers know about his corporate structure.
I lease my office from a company, and they have 3500 offices around the world, and each is a separate corporation. So that each is individual. Movie companies are famous for this. They set each movie up as a separate corporation. This is the main reasons that movies never show any profits. And if an actor agrees to x% of the profits of a movie, the actor will never get paid anything. Which is why the actor should always agree to a percentage of the gross.
Of course, there are very important concepts, like making sure there's no alter ego or being able to pierce the corporate veil, but that's a whole other issue.
Finally, you always want to carry the appropriate insurances. That will also cover you to a major extent, and the insurance company's lawyers will defend you for free, which is a super huge deal. Unless you go over the limits of coverage, or course. And all kinds of business insurance is available, you should be very aware. For example, just a few months ago, I talked to a business owner who was sued for employee discrimination and harassment, false firing and all kinds of crap. He paid for it out of his pocket, but went broke after $75,000, and kind of just got depressed and gave up. As a result, the person suing got an award for $1.2 million. I asked why he didn't have Employment Practices Liability Insurance (EPLI), and he said he didn't know what it was. I said it protects a company from those harassment lawsuits, and the insurance company pays all the defense (which can go over $150K, just to prepare the legal case, not even including going to court. And it also covers any awards to the person suing, up to an amount that the business owner chooses (the higher the insurance amount, the higher the premium payments)
Of course, a corporation's main value is that it protects the owner's personal assets from people who sue. HOWEVER, it will NOT protect you unless you follow corporation rules. If you co-mingle funds, for example (write company checks for your personal use - ie pay for child's private school tuition), and other things like that, the courts will decide that it is NOT a corporation and your personal assets will come into play. This is called pie...
Editing my comment:
Thanks again for the depth offered. I don't have any employees or physical products, so hopefully just Delaware or any other tax free state would be just fine.
I have personal assets in a few states and I am married, so I understand that if I just follow the strict rules of not mixing funds and operations then I will not have my personal assets seized on this technicality.
It sounds like the proper thing to do is make a lot of money and then incorporate. I don't mind paying the fees of a few grand, but that's actually just table stakes when compared to the cost of litigating a frivolous lawsuit like from a patent troll or people who make it their profession to sue businesses.
I have heard that even with insurance and being apart of groups that band together to prevent themselves from the brunt of these costs, it still costs tens of thousands of dollars to protect yourself from a default judgment.
I have a great business and great customers-- this legal risk does nothing but get in the way of that!
It's ok to make a lot of money and then incorporate, but if you already have customers and money, you might as well do it now. If your business is not complicated, then there are a lot of companies that will incorporate in any state for $50 (not including state filing fees - that cost depends on the state). https://www.swyftfilings.com/ A C corporation in California costs $49 for the Basic option. California state filing fee is $100, for a total of $149. So you don't have to pay a few grand to a lawyer in order to incorporate. Again, if it is an "easy" business, you can do it yourself. If you were building a nuclear power plant, you would want to get a lawyer to draw up the incorporation papers. I know you're not going to, but just giving an example.
Depending on your business and situation, you want to incorporate as soon as possible. The reason is that if you don't incorporate for 2 years, and you do something that someone can sue you for, then they can come after you personally. They could even sue you personally for all your stock in your company and take over your company, because you own the stocks personally. So that is a consideration. So if your company is making $20K per month, just incorporate. But even if your business is making $1000 a month, if you make a mistake that someone can sue for, if they win a $500,000 lawsuit, they will be able to garnish future wages, take away any future earnings until you pay the judgement.
Again, if you create different corporations, you can transfer all the very valuable assets to that company and put those assets beyond reach of any lawsuit. But, you should do it now. If you create a corporation after you are served with a lawsuit, the judge will see right through that and put those assets right back into the mix. So you put the company's assets in a separate corporation TODAY, and if someone sues you 5 years from now, that can cover you. So, for instance, you can start a marketing company up, that does all your marketing. If your company has a profit of $200,000, then you can pay marketing costs of $200,000 to the marketing company, and your main company has no money in it for anyone to sue you. But again, you can't do it last minute. You can start an internet company and have it create your website and pay them $200,000. You could start an IP company and license it's IP for $200,000 per year in order to get cash out of your company. Same thing for any other capital assets that you may own.
A much bigger threat than a patent troll is insurance. I don't know if you will have employees, but much more important to have EPLI insurance, for example. You should have E&O insurance, which insures you if you f-ck up. Like if an accountant totally flucks up a company because they made a huge mistake, and costs their client $750,000, you better have E&O insurance. Computer programmers, lawyers and others must have E&O.
But if you get the correct EPLI, you won't have to pay a dime for the lawsuit. Well, of course if you engage in purposeful malfeasance, then insuranced, corporations, or anything else will be null and void. This is for honest mistakes and accidents, never for rip offs. I'm not in any way saying you will, just giving you an accurate overview.
I don't know what your business is, so I don't know about the risk. Is it a dangerous thing, like rock climbing or wingsuit, or crabbing in the Artic Ocean? Because then the risk is great. But if it is reselling feather pillows, I think you are worrying to much about lawsuits. But again, I don't know what industry you are in and how delivered.
But again, the legal structures (separating out valuable assets into other corporations, insurance, etc) is important.
But there are so many other greater risks. Embez...