In my experience, most needlepoint shop owners start a store because they love the craft of needlepoint stitching.
So one fine day, usually as a second career, or as a retirement hobby, they take the plunge.
They love needlepoint. They love people who stitch. What could go wrong? After all, it’s not as if they are putting up their life savings.
Alas, what first time needlepoint owners many not initially realize, is that — unless they are extremely careful — this decision could suddenly lead them to financial ruin.
Often small businesses organize themselves as business entities that are known as LLCs, or limited liability corporations. The key word here is limited. The other key word is liability.
Together, these beautiful words seem to confer on LLCs the sunny legal proposition that you can enjoy filing a minimal amount of corporate busy work (minutes, annual meetings, etc), derive the benefits of pass through income tax reporting (in particular, your income from the business is only taxed once) — yet retain the protection of what is known as the famous corporate veil.
Now I am sure if you interested in starting your own needlepoint biz, you have read all the dire generic warnings about how not to comingle personal and business accounts, how to avoid running the risk of having the courts looking at your business as an alter ego entity, and so on, so there is no need for me to repeat all that here.
Instead, let give you a simple real world example as to how — if you’re not careful — your LLC offers you scant protection from predators in the first few years of the life of your beautiful needlepoint store dream.
Having set up your LLC, you confidently rent a retail space in a plaza.
The owner of the mall says to you, hey, you need to put your store’s name up in the mall directory, which is basically a plastic road sign screwed to two metal poles. The mall owner tells you have to pay for this service, but it is only 100 dollars. He gives you the name of the sign guy who has done this sort of work for other stores in the mall.
So you make the necessary arrangements, and the sign guy shows up with your new sign, climbs up a ladder to install it, falls off the ladder, and reportedly sustains a serious injury, one that may permanently incapacitate him.
Next thing you know, you are contacted by a lawyer type asking for 5 million in damages, and threatening to sue you personally for this unfortunate turn of events — but he’ll consider settling out of court for half a million.
Go ahead, you say, unintimidated and secure in the knowledge that you are well insulated from this sort of nasty business by your impregnable, unbreachable, impermeable LLC.
But then, just in case, you consult a lawyer anyway (who charges you 400 dollars an hour) and he tells you the following:
1. when you signed the lease with your landlord, and agreed (because he insisted on it) to have it in your name not your LLCs, you allowed the landlord to pierce the corporate veil. In a court of law, this can be used as a precedent.
2. when you took out liability insurance for your store, it was only to protect you from lawsuits of events taking place inside the store. True the landlord is responsible for liability outside the store, but because you personally are the one who contracted the sign guy to put up your sign (albeit on your landlord’s advice), then in a court of law, a crafty unscrupulous lawyer can use this to devour your assets.
3. when you took out that nice business credit card from that nice bank, that insisted you be its guarantor, you allowed the bank selling you the card to pierce the corporate veil. It does not matter that banks will not issue cards to new businesses without this assurance; you signed the agreement, and now the sign guy’s lawyer can use it to prove in a court of law that there is no separation between your personal assets and the assets of your LLC.
4, and, last, but not least, when you also agreed to be the ultimate guarantor with your credit card processor, without whom you could not run your nascent business… well, guess what….?
And even if this sign guy’s lawyer fails to make his case, your lawyer continues, remember he is working on contingency, and any lawyer you hire to defend you won’t be. So settle out of court, even though this LLC business may have ended up sucking up much of your liquid assets — or risk being in debt for the rest of your days. After all, you’ll still have your Florida homesteaded house to live in, at least for a while.
I hope you never have to encounter a situation like this, should you ever open up a needlepoint store.
However, unless you have very carefully considered these sorts of issues, you may be lulled into mistakenly thinking that you are being offered much by way of protection by operating your brand new needlepoint store as an LLC.
The truth of the matter is that almost every outside business you come in contact with, from the phone company, to the bank, to the credit card processor salesperson, even to the smiling lawyer you have hired to protect you, will ask for your driver’s license, social security number, a copy of your passport, and who knows what else.
To the owner of a new needlepoint business, the harsh reality is this:
What corporate veil protection you think you have secured by dint of your LLC is about as substantive as an itsy-bitsy, teeny-weeny, yellow polka dot bikini.
Still want that signage put up?
© Erin McGrath and Needlepointland.com, 2012 – 2016
Free stock image from Dreamtime.