WHY IS IT IMPORTANT TO LIMIT YOUR PERSONAL LIABILITY?  JUST ASK THE PIG FARMER

Recently I heard about a guy who raises show pigs that he exhibits at events like state fairs and the National Western Stock Show in Denver. These pigs have pedigrees, are bred just like racehorses, and can sell for thousands of dollars at auction.

What, you may ask, is the link between a pig and the subject of limiting liability?  It turns out that this fellow, who has thousands of dollars invested in his prize pigs, is doing business as a sole proprietor.  That means he does not have a corporation or limited liability company to hold his business operations and assets.

What’s the problem?  Don’t lots of businesses run this way?  Yes, but unlike the shareholder of a corporation or the member of a limited liability company (an LLC), a sole proprietor is personally liable for anything and everything that happens in his or her business. If someone sues a sole proprietor, he or she could lose everything, including his or her house, car, etc. If one of his pigs, which can weigh up to 500 lbs., injures someone, such as a child who wants to pet it at the state fair, the sole proprietor could lose everything in an injury lawsuit.

One great advantage of a corporation or LLC is that they provide limited liability for the business owner.  That is, the business owner isn’t personally liable for the debts of the business, and if the corporation or LLC is sued, only the entity’s assets are at risk, not the business owner’s personal property, such as the family home.

This liability shield makes using a corporation or LLC very attractive, but many business people continue to run their businesses as sole proprietors because they do not want to pay the cost of forming a corporation or LLC.  The cost in terms of personal liability, however, could be much greater than the few hundred dollars that it takes to start and maintain a corporation or LLC.  Also, if you hope to attract outside investors as your business grows, those investors will require you to have a corporation or LLC in place before they will invest.

The takeaway?  Don’t be like the show-pig guy, and put everything you’ve built at risk. Form a corporation or LLC if you are starting a business.