Many businesses start out on the fly. You start making a product, your family and friends love it, you decide to start selling it and boom! you have a business before you even know it. In an effort to save on some start up costs, you might delay incorporating or even getting insurance for your business. This is a bad idea and can expose you and your assets to claims.
What's a boot strapping new business owner to do? If your state has them, form an LLC! An LLC is a limited liability company and its purpose is to do just that, limit the owner's liability. Many people mistakenly think it's a corporation and there will be all kinds of complicated tax issues. Not so. Unless you elect otherwise, an LLC is taxed just like the owner, which means you just report your profits and losses on your personal income taxes. Eventually, if you are dealing with a large number of profits, you may want to elect to be taxed otherwise, but make sure you have a good accountant in place to help you make the switch.
In the meantime, any liability incurred by the LLC is assigned to the LLC, not the owner of the company. It's a win win for most small business owners. Does this mean you don't need liability insurance? No! You should still get the proper insurance, especially if you own a brick and mortar business. For example, if someone slips and falls and brings a lawsuit, your liability insurance will defend you, covering any claims and attorney's fees. Without the insurance, you'd be facing costly legal fees on your own.
In short, don't save money by not setting up the proper business entity and buying appropriate business insurance. Consult a small business lawyer for advice.
Sarah E. Holmes is a Philadelphia business attorney and strategist that helps start ups and established businesses looking to expand, protect their assets and increase their profits in an approachable, down-to-earth way. When you're looking for a business lawyer near you, we offer several convenient locations.