Sole Proprietorship Horror Stories to Avoid!

Have you incorporated your business yet? My concern for you, however, is that you have instead decided to start your business as a sole proprietorship.  I feel a great responsibility to share the possible consequences if you chose this route.

Here is a sad, but true story that happened to an individual in Florida. This example serves as a great reminder of why you must not operate as a sole proprietorship — and risk becoming another statistic.

A woman in Florida with multiple millions in safe assets started selling dolls at a local flea market as a sort of hobby/occupation. She was retired and didn’t need to work, but loved dolls — however, she neglected to incorporate her “little” doll business.  A parent brought home one of her dolls for their three-year-old child.  Unfortunately, one arm broke off of the doll, and the metal support inside of the arm poked the girl’s eye, causing permanent damage. This poor woman is now being sued for product liability to the tune of $5 million. Most of her assets are now at risk!

A sobering story, I’m sure you’ll agree.  Here’s yet another major reason NOT to operate as a sole proprietorship: A Marketing Benefit

We live and do business in a competitive world. You probably already know that 95% of businesses fail in the first five years. When starting off in a new business, the first impression you make on new prospects is critical. In fact, many “could have been great” companies were only three to five new customers short of reaching the next level of success. One mistake could cost such a company — or you — your entire business.

From a marketing prospective, what message are you sending to your new prospects about you and your business? What message do you send as a sole proprietor?

The typical CPA recommends that if you don’t make over $40,000 in net profit, incorporating may not make sense for you and may not reduce your taxes. That’s no secret.

Knowing this, what message are you sending when your business card bills you as “Owner/Operator”? New prospects know that you didn’t incorporate, and they probably assume that they know the reason why – that you probably don’t earn $40,000 in profits, and your CPA recommended for tax reasons that you remain a sole proprietorship. Worse, you didn’t believe in yourself enough to invest the money to incorporate.

Are those the messages you want to convey when trying to attract new business?

When you incorporate, you send a very different message: “This is John Smith, CEO of ABC, Inc.” That “foot in the door” strategy is far superior to “This is John Smith, Owner/Operator of ABC.”

Bottom line? From a purely marketing point of view, incorporating makes 100% sense!

DBAs: A Costly Mistake!

The designation of “d.b.a.” (doing business as) has become as common as dirt among sole proprietors.  Many seem to believe that a business name such as “X, d.b.a. Y” somehow relieves them of personal liability. This is not so: The designation “d.b.a” is merely descriptive of the person or corporation who does business under some other name, but doing business under another name does not create a protective entity distinct from the person operating the business.

Started Out as a Sole Proprietorship and Now Incorporated —

Are you Safe? Think again!

Although the sole proprietor who incorporates later gets a “B” for effort, he or she still faces a sticky problem.  Many of these business owners falsely believe that because they have incorporated, they have eliminated their liability issues. That is not the case. The rule of liability applies even if a business begins as a sole proprietorship, then converts to a corporation. For the period of time the sole proprietorship existed, personally liability attaches to the owner.  The new business entity is merely a continuation of the previous one.  That is, the new business has the same ownership but merely “wears different clothes.”

It’s therefore quite dangerous for someone to begin their business as a sole proprietorship, with the thought of converting the business into a corporation at a later time.  If a liability issue arises at any time from the initial sole proprietorship period, the owner will be personally liable. The only way to avoid personal liability is to incorporate at the outset.

The Odds Are Against You!

Here are some shocking statistics:  The odds that you will be sued are bigger than you think!

• The average jury award for a wrongful termination suit is
  now a staggering $532,000.
• Awards for work-related gender discrimination
  average $502,000.
• Racial discrimination awards average $198,000.
• Handicap discrimination awards average $159,000.
• Sexual harassment awards are now averaging $120,000.
• The State Farm Insurance Company paid an incredible $239 million for failing to use female insurance agents.
• A dishwasher at The Olive Garden was awarded $125,000 for suffering physical and verbal abuse.
• The average cost of defending yourself in litigation has gone through the roof.  Just a few short years ago, the average defense cost was $40,000.  Today that has increased by a whopping 33.3% to $60,000.
• If, on the other hand, you are liable, you should be prepared to pay as much as 35-50% of the total claim, plus interest, court costs, attorney fees and penalties.  So for example, if you are sued for $200,000, you could wind up paying as much as $300,000 by the time all is said and done.

Now, let’s address an important question:
Will insurance help you?

Consider these insurance statistics:

• In 1999, 40 insurance companies defaulted and are now out of business.
• By the year 2000, 56 more companies defaulted.
• In fact, according to Standard & Poor’s, 456 insurers are now considered “at risk.”  Could one of them be yours?

Even those insurance companies that have stayed in business…

• Have been forced to raise their rates dramatically.
• Other industries such as the construction industry are seeing liability increases from a low of 15% to a high of 100% in a single year. (Source: McGraw Hill)
• In one case, a group home saw their insurance increase from $3,500 to an incredible $35,000 in a single year.
• What would that kind of rate hike do to your company?

Do you see why I encourage you to call NCP today to get the process started to protect yourself and your hard-earned assets? Call us at 1-888-627-7007, and together we can tailor-fit the perfect solutions for your situation, moving you toward the future of protecting your business.