Thread: Sole Proprietorship vs. LLC ?

I'm starting a home inspection business, and was wondering what thoughts any of you had about the merits of an LLC vs. a Sole Proprietorship vs a Corporation. Any thoughts or suggestions for a newbie?
Thanks,
John L. Duncan
(soon to be) Duncan Home Inspection Services

Here's my advice and you can take it or leave it.

First of all, get out there and start working before you go spending a bunch of money on incorporating, or becoming a LLC.

Just be a sole-Proprietorship for the first year or so to see if you even make it in the business.

Your not going to like this comment and many will disagree with me on the subject, but I would not put my personal name within your business name.
Lawyers will pull all your personal assets into a lawsuit if you ever get sued. Your truck and your tool bag is not enough assets for them, be prepared they'll come after everything with the name "Duncan" on it.

Get some E&O insurance. Don't get the minumun either. It will cost you in the long run if you do.

Protect all your assets, and see an attorney on how to do so.

By the way, welcome to the board and good luck in your new endeavor.

Rick Hurst

Excellent advice, thank you.

Read this
http://www.rjmintz.com/apptoc.htm
then find a good lawyer and talk to him about this subject, your contract and anything else he can do to help protect yourself and your business. Every state can be different so you need to know about your state, not from a home inspector in a different state that possibly has to follow different laws.

Originally Posted by Rick Hurst

First of all, get out there and start working before you go spending a bunch of money on incorporating, or becoming a LLC. Just be a sole-Proprietorship for the first year or so to see if you even make it in the business.

One problem with this is that you are more likely to miss something big in your first year. Rick's reasoning is understandable, but I would disagree.

Originally Posted by Rick Hurst

Your not going to like this comment and many will disagree with me on the subject, but I would not put my personal name within your business name.

I agree completely. Keep personal and professional as separate as possible. Maybe even set up a living trust to put all of your major assets into to provide another level of legal separation.

Originally Posted by Rick Hurst

Get some E&O insurance. Don't get the minumun either. It will cost you in the long run if you do. Rick Hurst

The importance of E&O cannot be overstated. It provides yet another level of separation.

LLC or Corp really don't offer your assets any protection unless you have employees. Then your personal assets may be protected from their mistakes.

Think about it.

Every inspection you personally do, you will be held accountable for (if you goof), no matter what your business set up is. The rational behind having a corp or llc in a one man show is more of a tax thing than liability thing.

If a driver (Joe) from ACME bus company Inc (owned by Bob), gets in an accident, the plantiffs will sue, the driver (Joe, personally), ACME (the corp) and probably the bus manufacturer (just for fun). If Joe is an employee of ACME, the owner of ACME (Bob) will not have his personal assets included in the suit.

However, if Bob (owner of ACME) is driving the bus, you can bet his personal assets are at risk.

And this...

Originally Posted by Kevin Luce

find a good lawyer and talk to him about this subject, your contract and anything else he can do to help protect yourself and your business. .

is the best advice you'll ever get on the subject.

All the information that I have read (included stuff written by lawyers) says that we are personally protected. Now I know things are different from state to state but I have a hard time believing that everything I have read is that far off base.

From the link I posted:
"Most particularly, the LLC provides the protection from liability of a corporation without the formalities of corporate minutes, bylaws, directors, and shareholder. In contrast to corporate law, which allows shareholders and officers to be individually sued if the corporate formalities are not followed, the LLC law specifically bars a lawsuit against a member of the liabilities of the LLC."

"A primary goal of the LLC legislation was to change this result by clearly stating that the members and managers of the LLC could not be named in a lawsuit against the company."

As a owner and home inspector, I am considered manager & a member.

From Wikipedia, the free encyclopedia

A limited liability company (abbreviated L.L.C. or LLC) in the law of the vast majority of the United States is a legal form of business company offering limited liability to its owners. Often incorrectly called a "limited liability corporation" (instead of company), it is a hybrid business entity having characteristics of both a corporation and a partnership. It is often more flexible, the owners have limited liability for the actions and debts of the company, and it is suitable for smaller companies with a single owner. The primary corporate characteristic is limited liability while the primary partnership characteristic is the availability of pass-through income taxation.

I see the words "...suitable for smaller companies with a single owner." So what I'm hearing from some of you guys is that LLC that is designed for single owners gives no protection from lawsuit. How can sooo many people post the wrong information? It makes the "see in walls with an infrared camera" seem so trivial.

I also remember reading many post by home inspectors that felt that taking pictures of the interior of the sellers house is against the law. I think that has been laid to rest by most.

Like I always say, check with your lawyer. We are just home inspectors that feel we know everything but know that we don't.

Originally Posted by Kevin Luce

I see the words "...suitable for smaller companies with a single owner." So what I'm hearing from some of you guys is that LLC that is designed for single owners gives no protection from lawsuit. How can sooo many people post the wrong information? It makes the "see in walls with an infrared camera" seem so trivial.

.

Kevin,

Read my example.

A Corp or LLC does offer personal protection form actions taken against the LLC or corp (think Bill Gates personal fortune protected if one of his programers lets loose a virus from MS HQ).

It offers no protection for the personal actions of the principals.

Specific to a one man show HI operation. If you, doing the inspection yourself, mess up, and there is a lawsuit filed I gaurantee you'll be named, personally in the suit. The corp cannot protect you from your own negligent acts.

It can protect your personal assets from the negligent acts of others, who are working for the corp.

Here's another example.

My company - Owl Home Inspections, Inc. hires an inspector, we'll call him Kevin. Kevin does an inspection and misses a significant defect that results in a lawsuit being filed. Who do you think will be named in the suit?

Probably Kevin and Owl Home Inspections, Inc.

The assets of Kevin and Owl are at risk.

How does that change if I, personally do the inspection?

I agree with you in..

Originally Posted by Kevin Luce

. How can sooo many people post the wrong information? .

Ask your lawyer.

Originally Posted by Kevin Luce

All the information that I have read (included stuff written by lawyers) says that we are personally protected.
Yes, but not from your own acts.

From Wikipedia, the free encyclopedia

A limited liability company ...
the owners have limited liability for the actions and debts of the company, .

Yes, limited liability (and here's the key phrase) for the actions and debts of the company.

Says nothing of limited liability for your own personal actions.

And, from your link.. (emphasis mine)

Substitute Inspector for physician

Originally Posted by kevin's link

The problem for physicians is that personal liability for malpractice cannot be limited by using a corporation. Regardless of whether you conduct your practice through a PC, you will not be shielded from any claims asserted for injury to a patient. If you lose a case, any amount not covered by your insurance will be satisfied from your personal assets. With jury awards of $3 million and up occurring with some regularity—your entire net worth is on the line with every patient you treat.

We will see that if you cannot legally shield yourself from liability—the proper strategy is to protect what you own from a potential claim.

This is what I've been consistently told as well: a corporation or LLC protects my personal assets from a mistake made by an inspector in my employ, however it does not protect me from being sued on the basis of my own professional negligence in the course of inspection I perform myself.

What an LLC can is protect the assets of one LLC against a judgment against another, for instance the recommendation I've received is to hold each rental property in a separate LLC.

Paying for E&O and GL insurance for the first year or two in the business is really unplesent, but that's when your most likely to make a major mistake, and I slept a lot better knowing that my personal liability was limited to the deductible in the event I did make such a error.

And once you bite the bullet for insurance, the difference between maximum and minimum coverage is a few hundred dollars.

Originally Posted by Michael Thomas

This is what I've been consistently told as well: a corporation or LLC protects my personal assets from a mistake made by an inspector in my employ, however it does not protect me from being sued on the basis of my own professional negligence in the course of inspection I perform myself.

What an LLC can is protect the assets of one LLC against a judgment against another, for instance the recommendation I've received is to hold each rental property in a separate LLC.

Paying for E&O and GL insurance for the first year or two in the business is really unplesent, but that's when your most likely to make a major mistake, and I slept a lot better knowing that my personal liability was limited to the deductible in the event I did make such a error.

And once you bite the bullet for insurance, the difference between maximum and minimum coverage is a few hundred dollars.

This what i have come to understand. So don't all the big bucks on a Corp. or LLC. if you are a sole owner/inspector.

Best

Ron

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