When Two Business Entities Are Better Than One

nospam@example.com (Terri Henry - Contributor) — Mon, 07 Jun 2010 11:55:00 -0500

Most business owners know that they need to form either a corporation
or LLC to protect themselves from the risks associated with running
businesses in our modern world. Alas, most don't think through the
process to its logical end when evaluating these risks. As a result,
they often don't realize that they may need two, not one, business
entities.

Let's start with a simple question. Why do you form a business entity?
Yes, there can be tax reasons, but most form them to protect themselves
from the risks associated with being in business. These risks include
being sued for a ton of money or having creditors come after the company
to collect debts. Business entities are great at creating a shield
between you, the owner, and these debts. The question is whether that is
enough. For many businesses, it is not.

So, what is the problem? The problem is most of your valuable and
critical assets are actually owned by the corporation. This means they
are exposed to the risks of running the business. Consider an example. I
own a hosting company for websites. I incorporate it and business goes
really well. Everyone knows "Chapo's Hosting". I have a trademark, logo
and the whole nine yards. My servers get hacked in the first week of
December and all the sites of my clients are down for the first 10 days
of the month, the busiest on the web. I get sued for millions. While I
am not going to be personally liable, I am going to lose all my servers,
equipment, trademark and logo to the companies suing me. Once I lose
all of those, it is just a matter of time till I can't meet my personal
bills and lose my home, car and so on. We are talking about a nightmare!

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When Two Business Entities Are Better Than One