ADVANTAGES OF BEING A REGISTERED BUSINESS ENTITY
Though each type of business entity (except a sole proprietorship) has advantages and disadvantages, one thing is true for all but the sole proprietorship: being a business entity (be it a corporation, limited liability business entity (of which there are many but which we will call generally “LLC” – limited liability company) protects it equity owners (i.e. shareholders in corporations and “members” or “partners” in a LLC) from personal liability for the debts or losses of the business entity.
This is best demonstrated by the following:
You are the inventor of the very first teleportation device that works 100% of the time. You nearest competitor’s machines work 98% of the time which is great unless you are the 2% in which case your molecules are split into several packages and are sent to the moon, to Georgia, and of course to Detroit. What happens if:
a. An employee slips and falls on the factory floor and has $1,000,000 in medical expenses;
b. A completed machine falls on a customer who is mistakenly teleported to the one place that he or she never wanted to go; or,
c. In truth, your machine fails its final tests, and you owe the manufacturer of the computers used in the machines $500,000.
In each case, if you are a sole proprietor (i.e. “Mark Bob doing business as The Moving Machine”), you are personally liable and all of your personal assets are exposed to loss.
If however, you first formed a corporation or other LLC, then at the least your shareholders/members and in most cases (absent fraud or failure to maintain the corporate status) the officers, directors, and the day-to-day operators of the LLC (usually called a “manager”), are all free of any personal liability. If the business entity has no funds then even though the employee, customer, and vendor each win a large verdict, they will be able to collect only from a business entity – which as we noted – that has no assets. Blood from a turnip is an appropriate analogy.