Are your personal assets protected from your business liabilities?

A proprietorship is the business equivalent of nothing. A vacuum. You’re a proprietorship if you never bothered to incorporate or LLC your business. So proprietorships are the cheesecloth of business entities: everything passes through a proprietorship to its owner -- including creditors.

On the asset protection scale of what works, a proprietorship is a zero.

So why would someone want to be in a business as a proprietorship?  Well, it’s seductively easy, a real do-it-yourselfer. Pick a name for your business.  Print up some business cards and stationery showing the name.  Get a website. Voilà. You’re now a proprietorship.  But big deal.

Your assets are protected like Superman was protected from Kryptonite: not at all. And if you have business liability insurance, that’s certainly helpful. But did you ever hear of an insurance company denying a claim? Thought so.

Let’s consider a classic: “Buffalo Bill’s Wild West Show, William F. Cody, Proprietor.”

If Annie Oakley took someone’s eye out while she was performing in the Wild West Show, the injured spectator would have quite the lawsuit. Everyone else in the audience would be a witness.  If the injured person won the jury’s sympathies and got a verdict, the judgment would be against Buffalo Bill himself.

It would not be a verdict against Buffalo Bill’s corporation because there’s no corporation.  It wouldn’t be a judgment against “Wild West Show Limited Partnership” because there isn’t one.  Would it be against “Buffalo Bill’s Wild West Show Limited Liability Company? Wrong again.  Buffalo Bill didn’t put his business in an LLC.

So all of Buffalo Bill’s personal assets would be fair game to satisfy the judgment.  After insurance paid its part – if insurance paid its part – whatever else Buffalo Bill owned would not be protected one whit.  This would include his personal savings, stocks, real estate, even his ownership of his proprietorship.  Say “Adios, Wild West Show.”

What’s going on here?

A proprietorship is a nothing.  It’s a five-syllable word that indicates someone’s in business. And that’s it.

Adding the letters “d/b/a” -- the abbreviation for “doing business as” -- so you present yourself as “William Frederick Cody, d/b/a Buffalo Bill’s Wild West Show,” gives you zero protection.  Using the word “consultant” doesn’t add any protection, either.

So if you want to protect your personal assets from what your business does, start with three basic steps.

• First, your lawyer can show you how to do parts of the formation yourself online.  You'll then want your attorney to guide you through the paperwork to create the liability shield. (The “$49 specials” on the Internet do not begin to do the job, by the way.)
• Second, do what’s required by State and Federal law. Just because you don’t want to deal with little things like the Internal Revenue Code, Wage and Hour law, and Workers Comp, doesn’t make you exempt.
• Third, comply with the annual requirements.  Cinderella’s carriage was transformed into a pumpkin at midnight; something similar can happen to your business if you don’t pay the annual fee to the Secretary of State.  In Georgia, it’s $50.00.  And have an annual meeting, at the least.

So if you want the liability protection given by law for yourself, go get it.  Don’t assume it just happens.  It doesn’t.

Fox+Mattson, P.C. has again provided the Georgia model LLC documents for the 2011-2012 edition of the "Limited Liability Company Handbook" published by West Thomson Reuters as part of their Securities Law Handbook Series. The Handbook is edited by Mark A. Sargent, Dean of the Villanova University School of Law, and Walter D. Schwidetzky,  Professor at the University of Baltimore School of Law.