Legal Issues

[911WhoDis]

What legal issues do i need to know about when selling things online, I am planning on starting a mini importing/online business. Obviously I am not going to start with a lot of capital, but is there anything i need to know about (getting sued, etc) I don't want to lose my home and shit cause obviously I am going to start up as a sole proprietor, and i have wont have protection from things like that. Can anyone experienced in this type of business start up give me some advice about legal things.

 

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[Vigilante]

It is actually technically illegal for anybody other than a licensed attorney to give other people any form of legal advice. That's the reason why you find very little competent legal answers to your questions here or on most forums. However, what you need to do is go to the library and get some books on entrepreneurship, small business, and how to start a business. You will find 99% of your answers at the library.

 

[pickeringmt]

It is actually technically illegal for anybody other than a licensed attorney to give other people any form of legal advice. That's the reason why you find very little competent legal answers to your questions here or on most forums. However, what you need to do is go to the library and get some books on entrepreneurship, small business, and how to start a business. You will find 99% of your answers at the library.

Library?
so like a place that isn't on the internet?
I am totally confused....

 

[Vigilante]

Library?
so like a place that isn't on the internet?
I am totally confused....

I'm old.

 

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[pickeringmt]

I'm old.

Im kidding man, like I would actually buy all of the different "Where's Waldo" books

 

[Mattie]

I don't know if I'd trust everything on the internet about Law. Libraries have good Law books and rows and rows. More legit.

 

[randomnumber314]

It is actually technically illegal for anybody other than a licensed attorney to give other people any form of legal advice. That's the reason why you find very little competent legal answers to your questions here or on most forums. However, what you need to do is go to the library and get some books on entrepreneurship, small business, and how to start a business. You will find 99% of your answers at the library.

This may be true, but advising him to form an LLC and do business under that entity is sage--even when it comes from a guy whose avatar is a cowboy on a my-little-pony

 

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[Esquire]

This may be true, but advising him to form an LLC and do business under that entity is sage--even when it comes from a guy whose avatar is a cowboy on a my-little-pony

I have mixed feelings about LLCs.

On one hand ... yeah. They (do) offer "some" (limited) protection from (contractual) liability.

But ...

1. No one is going to extend a start-up LLC a line of credit unless the owner personally guarantees it. So there is no protection there.

2. LLCs can (sometimes) be pierced if the formalities are not strictly followed, mooting the limited protection.

3. The business owner may be judgment proof anyway ... mooting the protection. In other words ... unless your net equity exceeds what your state exemptions allow you to shelter ... no one can collect a judgment against you anyway. In Connecticut (for example) you can shelter up to $75k in home equity (per person) ($150k for a couple). Most homeowners do not have that much equity in their homes. As a practical matter ... judgment-proof business owners need no protection.

4. LLCs rack up a lot of fees each year ... money that could probably be put to better use. Nevada is fairly expensive ($500 a year). Wyoming is a much better bet. For start-ups ... the fees might not be worth it. Plus ... the paperwork is a pain in the a$$ ... and you need a designated agent for service of process (yet another set of recurring fees).

5. Incorporated businesses cannot represent themselves in court. Which takes the "pro se" option off the table if you need to defend a small claims action or file suit to collect a debt. As a sole proprietor you can represent yourself. Could save you a fair amount of money.

6. Nothing prevents you from converting to an LLC at a later date ... after the business has established itself ... or your net worth exceeds the state exemptions. Just include a clause in your contracts that says if and when the business converts to an LLC that all claims against the business will run exclusively to the company and there will be no contractual recourse against the original proprietor.

In other words ... (to sum it all up):

I think far too many people run out and create LLCs far too early in the process.

They spend a lot of money forming and maintaining LLCs ... and get little to no benefit from it. They just do it because they read somewhere that forming an LLC is what you are "supposed" to do ... and that forming an LLC is "smart."

Reality is ... all that time and money could be better put to use growing and marketing your business.

Sole proprietor may be the much better way to go for most entrepreneurs just starting out.

 

[911WhoDis]

I have mixed feelings about LLCs.

On one hand ... yeah. They (do) offer "some" (limited) protection from (contractual) liability.

But ...

1. No one is going to extend a start-up LLC a line of credit unless the owner personally guarantees it. So there is no protection there.

2. LLCs can (sometimes) be pierced if the formalities are not strictly followed, mooting the limited protection.

3. The business owner may be judgment proof anyway ... mooting the protection. In other words ... unless your net equity exceeds what your state exemptions allow you to shelter ... no one can collect a judgment against you anyway.

4. LLCs rack up a lot of fees each year ... money that could probably be put to better use. Nevada is fairly expensive. Wyoming is a much better bet. For start-ups ... the fees might not be worth it. Plus ... the paperwork is a pain in the a$$ ... and you need a designated agent for service of process (yet another set of recurring fees).

5. Incorporated businesses cannot represent themselves in court. Which takes the "pro se" option off the table if you need to defend a small claims action or file suit to collect a debt. As a sole proprietor you can represent yourself. Could save you a fair amount of money.

6. Nothing prevents you from converting to an LLC at a later date ... after the business has established itself ... or your net worth exceeds the state exemptions. Just include a clause in your contracts that says if and when the business converts to an LLC that all claims against the business will run exclusively to the company and there will be no contractual recourse against the original proprietor.

In other words ... (to sum it all up):

I think far too many people run out and create LLCs far too early in the process.

They spend a lot of money forming and maintaining LLCs ... and get little to no benefit from it. They just do it because they read somewhere that forming an LLC is what you are "supposed" to do ... and that forming an LLC is "smart."

Reality is ... all that time and money could be better put to use growing and marketing your business.

Sole proprietor may be the much better way to go for most entrepreneurs just starting out.

what about on the off chance that you sell a product that causes someone to get sick or hurt. If they come after you, all your assests would be up for grabs right?

 

[Esquire]

what about on the off chance that you sell a product that causes someone to get sick or hurt. If they come after you, all your assests would be up for grabs right?

This assumes a couple of things:

1. They sue you. Litigation costs money. Unless there is a good chance they can collect a judgment ... who is going to spend the money going after you? Just more salt in the wound. Often times (as a consumer protection trial lawyer) people would come to me with good cases (in theory) ... but I would turn them away because I did not think we would be able to collect the judgment if we won. No way am I going to invest my time and effort on a contingency fee basis for a judgment-proof debtor. Plus ... I also have to factor in the odds of you filing for bankruptcy ... in which case I'm totally F*cked. And I seriously doubt someone is going to pay a lawyer by the hour to pursue this kind of case.

In other words ... unless you've got "MJ Bucks" ... I wouldn't lose too much sleep over getting sued.

No one is going to spend a dollar chasing after a speculative nickel.

2. If you create a product that injures someone ... you might be liable anyway (regardless).

3. Bankruptcy protection is a nuclear option. In 90% of the cases you can eliminate the debt and keep all of your stuff. Another ace in the hole.

4. Like I mentioned in the prior post ... most (if not all) of your assets are likely exempt under state law. Or at least ... that is true for most folks. I don't know your financial situation ... but assuming you are just a regular guy starting out ... just about everything you own is likely exempt under state law.

Also: Bank executions can generally be avoided by not leaving your money hanging around in a local bank (that's where the state marshals go looking -- just do your banking out of state and odds are they will never find it).

Garnishments (in turn) require a paycheck (which self employed persons don't have).

It is ... in other words ... very VERY hard to collect a judgment against the average guy ... if not outright impossible.

So I would not lose too much sleep over that.

Now get me wrong ... there is "some" protection to be had by forming an LLC ... all I am saying is ... there is a trade-off.

Is the limited protection ... worth all of the time and money necessary to accommodate it ...?

Only you can make that decision.

But I am not convinced the answer is "yes" for most people just starting out.

LLCs make sense if you have significant non-exempt assets subject to execution (i.e. you are rich) ... or if you have existing judgment creditors who are pursuing you (in which case you should form an LLC in a state that limits remedies against single-member LLCs to a charging lien ... this is very important ... and a while different discussion).

I think most "new" businesses formed by "new" entrepreneurs just starting out would be better served operating as sole proprietors.

But that's just my unconventional opinion. Others may disagree.

 

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[Esquire]

Another consideration is CAN I file an LLC ...?

A lot of people form LLCs for businesses that cannot operate as LLCs.

There are (in most states) about 150 types of businesses that cannot operate as an LLC.

This is true of most regulated professions (for example).

So the first thing I would do (were you contemplating an LLC) is research whether what you are doing "can" be an LLC.

Otherwise ... you spend all this time and money forming a company and paying the fees ... only to find out (when you get sued) the LLC offers you no protection whatsoever (because it was operating in a prohibited field).

LLCs may also be a good way to go if you have several businesses and want to protect each business from the claims of the others.

So I guess you need to factor in whether you are doing one business or several.

But if you go the LLC route ... I think Wyoming LLCs are the best option.

 

[Vigilante]

I have mixed feelings about LLCs.

On one hand ... yeah. They (do) offer "some" (limited) protection from (contractual) liability.

But ...

1. No one is going to extend a start-up LLC a line of credit unless the owner personally guarantees it. So there is no protection there.

2. LLCs can (sometimes) be pierced if the formalities are not strictly followed, mooting the limited protection.

3. The business owner may be judgment proof anyway ... mooting the protection. In other words ... unless your net equity exceeds what your state exemptions allow you to shelter ... no one can collect a judgment against you anyway. In Connecticut (for example) you can shelter up to $75k in home equity (per person) ($150k for a couple). Most homeowners do not have that much equity in their homes. As a practical matter ... judgment-proof business owners need no protection.

4. LLCs rack up a lot of fees each year ... money that could probably be put to better use. Nevada is fairly expensive ($500 a year). Wyoming is a much better bet. For start-ups ... the fees might not be worth it. Plus ... the paperwork is a pain in the a$$ ... and you need a designated agent for service of process (yet another set of recurring fees).

5. Incorporated businesses cannot represent themselves in court. Which takes the "pro se" option off the table if you need to defend a small claims action or file suit to collect a debt. As a sole proprietor you can represent yourself. Could save you a fair amount of money.

6. Nothing prevents you from converting to an LLC at a later date ... after the business has established itself ... or your net worth exceeds the state exemptions. Just include a clause in your contracts that says if and when the business converts to an LLC that all claims against the business will run exclusively to the company and there will be no contractual recourse against the original proprietor.

In other words ... (to sum it all up):

I think far too many people run out and create LLCs far too early in the process.

They spend a lot of money forming and maintaining LLCs ... and get little to no benefit from it. They just do it because they read somewhere that forming an LLC is what you are "supposed" to do ... and that forming an LLC is "smart."

Reality is ... all that time and money could be better put to use growing and marketing your business.

Sole proprietor may be the much better way to go for most entrepreneurs just starting out.

And this... is why... I defer to attorneys.

 

[Vigilante]

I have mixed feelings about LLCs.

On one hand ... yeah. They (do) offer "some" (limited) protection from (contractual) liability.

But ...

1. No one is going to extend a start-up LLC a line of credit unless the owner personally guarantees it. So there is no protection there.

2. LLCs can (sometimes) be pierced if the formalities are not strictly followed, mooting the limited protection.

3. The business owner may be judgment proof anyway ... mooting the protection. In other words ... unless your net equity exceeds what your state exemptions allow you to shelter ... no one can collect a judgment against you anyway. In Connecticut (for example) you can shelter up to $75k in home equity (per person) ($150k for a couple). Most homeowners do not have that much equity in their homes. As a practical matter ... judgment-proof business owners need no protection.

4. LLCs rack up a lot of fees each year ... money that could probably be put to better use. Nevada is fairly expensive ($500 a year). Wyoming is a much better bet. For start-ups ... the fees might not be worth it. Plus ... the paperwork is a pain in the a$$ ... and you need a designated agent for service of process (yet another set of recurring fees).

5. Incorporated businesses cannot represent themselves in court. Which takes the "pro se" option off the table if you need to defend a small claims action or file suit to collect a debt. As a sole proprietor you can represent yourself. Could save you a fair amount of money.

6. Nothing prevents you from converting to an LLC at a later date ... after the business has established itself ... or your net worth exceeds the state exemptions. Just include a clause in your contracts that says if and when the business converts to an LLC that all claims against the business will run exclusively to the company and there will be no contractual recourse against the original proprietor.

In other words ... (to sum it all up):

I think far too many people run out and create LLCs far too early in the process.

They spend a lot of money forming and maintaining LLCs ... and get little to no benefit from it. They just do it because they read somewhere that forming an LLC is what you are "supposed" to do ... and that forming an LLC is "smart."

Reality is ... all that time and money could be better put to use growing and marketing your business.

Sole proprietor may be the much better way to go for most entrepreneurs just starting out.

@MJ DeMarco I wish we had an option to tag individual posts GOLD vs. threads. Because this post... was gold.

 

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[MJ DeMarco]

@MJ DeMarco I wish we had an option to tag individual posts GOLD vs. threads. Because this post... was gold.

Wonderful idea. Ill check to see if such a function exists.

 

[Esquire]

P.S. Wondering what to do with the first $500.00 saved on filing fees ...?

Esquire's got ya covered. Clip em for free!

 

[randomnumber314]

This assumes a couple of things:

1. They sue you. Litigation costs money. Unless there is a good chance they can collect a judgment ... who is going to spend the money going after you? Just more salt in the wound. Often times (as a consumer protection trial lawyer) people would come to me with good cases (in theory) ... but I would turn them away because I did not think we would be able to collect the judgment if we won. No way am I going to invest my time and effort on a contingency fee basis for a judgment-proof debtor. Plus ... I also have to factor in the odds of you filing for bankruptcy ... in which case I'm totally F*cked. And I seriously doubt someone is going to pay a lawyer by the hour to pursue this kind of case.

In other words ... unless you've got "MJ Bucks" ... I wouldn't lose too much sleep over getting sued.

No one is going to spend a dollar chasing after a speculative nickel.

2. If you create a product that injures someone ... you might be liable anyway (regardless).

3. Bankruptcy protection is a nuclear option. In 90% of the cases you can eliminate the debt and keep all of your stuff. Another ace in the hole.

4. Like I mentioned in the prior post ... most (if not all) of your assets are likely exempt under state law. Or at least ... that is true for most folks. I don't know your financial situation ... but assuming you are just a regular guy starting out ... just about everything you own is likely exempt under state law.

Also: Bank executions can generally be avoided by not leaving your money hanging around in a local bank (that's where the state marshals go looking -- just do your banking out of state and odds are they will never find it).

Garnishments (in turn) require a paycheck (which self employed persons don't have).

It is ... in other words ... very VERY hard to collect a judgment against the average guy ... if not outright impossible.

So I would not lose too much sleep over that.

Now get me wrong ... there is "some" protection to be had by forming an LLC ... all I am saying is ... there is a trade-off.

Is the limited protection ... worth all of the time and money necessary to accommodate it ...?

Only you can make that decision.

But I am not convinced the answer is "yes" for most people just starting out.

LLCs make sense if you have significant non-exempt assets subject to execution (i.e. you are rich) ... or if you have existing judgment creditors who are pursuing you (in which case you should form an LLC in a state that limits remedies against single-member LLCs to a charging lien ... this is very important ... and a while different discussion).

I think most "new" businesses formed by "new" entrepreneurs just starting out would be better served operating as sole proprietors.

But that's just my unconventional opinion. Others may disagree.

Great write up Esquire. I guess pony riding cowboys really don't know anything about LLC's

 

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[FastNAwesome]

@MJ DeMarco I think it would be awesome to be able to see all the posts we liked, just like we can see the list of our posts others have liked. Bookmarking does the trick, but just wanted to share a thought.

@Esquire I literally feel the urge to pay you.

Right now I'm broke, specifically because I wasted tremendous amount of time and money on trying to figure everything on my own.

While I was at it, the actual business opportunity faded away, I quit my job and burned through my savings.

So here I am, back to step 0, but the next time around I'll know much better, thanks to your PLATINUM posts.

 

[Esquire]

Two other LLC considerations I forgot to mention:

1. If someone sues you ... or threatens to sue you ... you (or your insurance company) might end up paying or settling the claim anyway. In which case ... who cares if you are an LLC or solo ...? $1000 out of your pocket ... is $1000 out of your pocket. Whether you or the LLC pays it ... makes no real difference to you ... right? So the LLC affords no benefit in that scenario. Ditto if the insurance company pays it. All the same to you.

2. You might never get sued in the first place... in which case you just spent thousands of dollars on LLC fees and registered agents ... and got nothing in return. Now ain't that precious ...?

LLCs are a nice cash cow for the state ... and a complete waste of time and money for many start-up entrepreneurs.

Again ... not saying you should or should not incorporate. I don't know the particulars of your situation.

Just giving you some things to think about that run counter to conventional wisdom.

 

[Esquire]

@Esquire I literally feel the urge to pay you.

Dont resist the urge. Obey your thirst.

Paying Esquire ... is Fastlane!

 

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[Determined2012]

I have read about people setting up am LLC and then filing additional paperwork to have it taxed as an S Corp.
Any reason why they just wouldn't flat out file an S Corp?

What all are they trying to gain by doing this?

What do you think @Esquire ?

 

[Esquire]

I have read about people setting up am LLC and then filing additional paperwork to have it taxed as an S Corp.
Any reason why they just wouldn't flat out file an S Corp?

What all are they trying to gain by doing this?

What do you think @Esquire ?

There are a number of reasons why you might prefer to be taxed like an S Corp ... particularly if you are a high income earner ... or if want to roll over corporate profits from one year to the next at a lower rate of taxation.

And there are other legitimate reasons why you might prefer to operate as an LLC instead of an S-Corp (or vice versa).

Suffice to say ... there are plenty of articles online about this. I'll save my fingers the typing and advise you to Google the question.

You'll find the answers.

 

[Walter Hay]

Many years ago, when I was preparing to franchise my importing business I attended a course on asset protection. It was a small amount of money well spent.

The franchise industry is a lawyer's dream, but fortunately I was able to get through unscathed, never being sued. Nevertheless it was nice to know that I owned nothing of high enough value to make me a worthwhile target.

 

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