Why Sole Proprietorship is NEVER a good idea in business.

Uncategorized Feb 11, 2020

"What do I do? I have a patient threatening me with a lawsuit. Oh, and I am a sole proprietor." -- A recent questioner

While those two statements have different remedies, they are closely related for one giant reason: if that patient prevails in the lawsuit, they may seek to recover their judgment from this provider's personal assets.


Transcript of video follows:

"Hi, I have a functional medicine business and I am operating as a sole proprietor, which means I don't have an LLC or any kind of corporation or any other kind of entity. Is that okay, Scott? Can I do that?"

Hi, I'm Scott Rattigan, the founder of Functional Lawyer and today we've got a Legal Quick Hitter for you, which is where we answer the most frequently asked questions that we see at Functionallawyer.com. Now this is one that I haven't seen that frequently, but it does come up enough to make me concerned. So no person should be operating any kind of business as a sole proprietor. It's too easy to register an LLC or a professional LLC with the state. It costs so little money and it's very easy to run one and it offers two main protection, not just an LLC, but most types of entities offer two main protections.

The reason why you'd get one is, number one, to have a little bit more favorable tax treatment from the IRS. There's a couple of nuances there and a lot of entities will allow you to have pass-through taxation, but there are additional tax treatment things that you get with an entity.

Number two is, and more importantly, an entity will shield your assets from personal liability, your personal assets from the creditors of the business. So what that means is let's say that you got sued or in the course of your employment, you were driving to a patient's house or you were driving somewhere in the scope of your employment in the scope of the business, you got into a car accident and caused $500,000 worth of damage. Now your general business liability should cover some of that and your auto insurance should cover some of that.

But let's say it was $2 million, right? Once they exhaust all the insurance proceeds, then they start coming after the assets of the business. Now, if you don't have an entity and they exhaust all the assets of the business, they can then come after the assets that you own personally. So your house, your car, your retirement accounts, they can garnish future wages, potentially. So that is obviously a problem, right? So it's very simple to do, to sign up and registering the entity in your state. What that does is it protects you, protect your personal assets from any creditors of the business. So running a business is hard and you'll probably hear the stats that many of them fail. So a lot of you probably have some creditors or some debt that you're carrying. So I don't think you'll fail, but in the unlikely event that any creditor need to come after you and collect on that debt, then your personal assets are protected.

So it comes up enough that it's concerning. So if you are thinking about starting your own functional medicine business or you've already started it and you are a sole proprietor or in a general partnership, please, please, please strongly consider forming an entity and registering with your state. If you have questions about that or any other legal issues related to functional medicine, please reach out to me or subscribe to the YouTube Channel here and we'll see you at Functionallawyer.com. You can follow us over there or on our Facebook page as well. Until next time. This is our Legal Quick Hitter and I'm Scott Rattigan with Functionallawyer.com.


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