Worst case scenario? 8

[rlee53]

I've read in a book about engineers going solo, that if you fail as a sole proprieter, as long as it wasn't for unethical or gross negligence reasons, it will not hamper your ability to reenter the work force; you will have learned new skills and be better because of your free lance experience. So worse case, your out the financial cost of the business failure, but you should be in a better position to find a job as an employee with your new business experience that was gained, and the courage and independence to have taken a risk.

Does anyone agree, disagree, or have anything to add to that?

 

[kbro151]

When in business, follow the rule of pay yourself first. Pay a monthly salary that reflects what your work is worth. This is a payroll expense. Payroll expenses are paid by companies before debts. If I remember correctly, the order is 1) Government, 2) employees, 3) lenders, 4) owners. Once you are in business, get your receipts up tot he point where you cover 1,2, and 3 and you can always meet your obligations. Anything after this is profit, and can go to the owners or to reinvestment, or anything else the business sees fit to spend money on.

If you do this and don't relegate yourself to last place in the chain, if your business has to file bankruptcy, your personal finances should not be affected beyond the capital lost in the business.

Remember, business failure does not necessarily equal personal financial ruin.

 

[SlideRuleEra]

IMHO, GregLocock has valid points. The original question is about the "worst case senerio"...

To me, that means you (finance) and start a business and it more or less goes continuously downhill - no profits and maybe not even any meaningful cash flow - just expenses (including payroll) which deplete capital. The "trick" is knowing when and how to VOLUNTARILY "pull the plug" (close the business) while there are still sufficient assets to cease operations and avoid bankruptcy - saving your reputation.

Either way (voluntary closure or bankruptcy), you, as an individual, will wind up "poorer" (whether a sole proprietor, corporation, or LLC) AND no matter where the money came from (savings, loans, etc.) - with one exception...

If you sold stock in your venture to others, they loose instead of you - not the way to keep friends or build a career, however.

http://www.SlideRuleEra.net

 

[arunmrao]

rlee 53
If you must start your business please go ahead and do so. But keep your commitments to a level that it does not hurt you or the family. Also keep a clear exit plan.

Rest do not brood over all those details discussed here. It is like this, when you visit a hospital,it is with an intention or desire of getting cured. You do not go and ask where is the mortuary? Though everyone knows that in the backyard and in the darkest corner the mortuary exists.

So take the positives and plunge into your venture.

 

[bvanhiel]

Greg,

Your maths are correct. Here's my maths:

House value is $100k. Borrow $50k. Get sued for $250k. Lose house.

or

I set up company. House value is $100k. Borrow $50k. Give $50k to company. Company gets sued for $250k. Keep house.

I prefer the latter.

-b

 

[HVACctrl]

bvanhiel,
From the looks of it, your "maths" are better. Doesn't sound like fairyland to me, but then again, I haven't looked into it very deeply.

http://www.engineerboards.com

 

[SlideRuleEra]

Here is what a respected third party web site has to say about personal loans, etc. and LLCs and Corporations:

First, the good news:

Like shareholders of a corporation, all LLC owners are protected from personal liability for business debts and claims. This means that if the business itself can't pay a creditor -- such as a supplier, a lender, or a landlord -- the creditor cannot legally come after any LLC member's house, car, or other personal possessions. Because only LLC assets are used to pay off business debts, LLC owners stand to lose only the money that they've invested in the LLC. This feature is often called "limited liability."

Then the bad news:

While LLC owners enjoy limited personal liability for many of their business transactions, this protection is not absolute. This drawback is not unique to LLCs, however -- the same exceptions apply to corporations. An LLC owner can be held personally liable if he or she:

personally and directly injures someone
personally guarantees a bank loan or a business debt on which the LLC defaults
fails to deposit taxes withheld from employees' wages
intentionally does something fraudulent, illegal, or reckless that causes harm to the company or to someone else, or
treats the LLC as an extension of his or her personal affairs, rather than as a separate legal entity.

Don't take my word for it, read it for yourself

http://www.nolo.com/article.cfm/cat.../D7043E4E-91CB-4B29-B8DC0DDA10AD4B3B/111/ART/

As stated above, notice that a Corporate structure is treated the same way. See it here

http://www.nolo.com/article.cfm/objectID/78FC3C83-30C0-4E57-9F6C7E7F8B45E726/111/182/241/ART/

There is no "free lunch", the US legal system in not that naive.

http://www.SlideRuleEra.net

 

[rlee53]

I'm not sure where "free lunch" came into the discussion, maybe I missed something. It think it is commonly understood at least in this country that corporations and LLC's only offer some limited legal protection for some situations.

 

[SlideRuleEra]

Sorry for putting the quotation mark in the wrong place, should have been "no free lunch", if this 1960's term is unfamiliar, for an explanation see

http://en.wikipedia.org/wiki/TANSTAAFL

http://www.SlideRuleEra.net

 

[arunmrao]

Slideruleera,

You have brought out the finer nuances in borrowing, about the situation under which personal liability clause can be enforced. More often than not,the Recovery department will start applying these to their advantage. Also there may be lot more in fine print which we tend to oversee while signing the loan documents. As you rightly said there can never be a free lunch!

 

[bvanhiel]

I think there's still some misunderstanding. By borrowing personally and then giving it to the company you are in no way getting out of the obligation to repay the loan. By forming a company you are ensuring that your obligation is limited to the value of the company, and that they can't take your personal assets if the company goes under. You'll still owe the original personal loan amount. No free lunch, but you can keep them from taking your dinner too.

If you look at the rules SlideRuleEra posted under which you could be liable in spite of the corporation you'll realize that they're the sort of rules all good companies follow. In practice it is very difficult to "pierce the corporate veil". A corporation is very good protection.

-b

 

[kbro151]

No matter how you fund your startup, the money loaned or given to the business is at risk. But, if you incorporate or properly use an LLC, the liability for business actions will be limited to the business assets, unless you do something criminal, fraudulent, or your only reason for using the company is to limit or escape from liability. These are things most of us will never need to worry about.

But, if you're the type who likes to skim profits or use business receipts to cover shortfalls in your checking account, or, if you would tell the cops that you are on business when you leave the bar and t-bone someone at the intersection, an LLC or corporation is not going to help you.

If you operate as a sole proprietor, then when you undersize a bolt and someone claims that you cost them 2 million in lost production, someone can sue you for all you personally have, including your house.

 

[Supercar1]

An LLC is a bare minumum. Watch the money that you are borrowing from yourself. Just because it is yours, you still should plan on giving it back. Until you have collateral assets, no banks will give you any money unless you sign a personal guarantee. Then the bank can come after your personal assets, as others have pointed out.

One disadvantage of owning your own business I found is that there will be very few businesses that you will want to work for after you had your own.

 

[tygerdawg]

Supercar1 said:

"One disadvantage of owning your own business I found is that there will be very few businesses that you will want to work for after you had your own."

ROGER THAT.

TygerDawg

 

[Supercar1]

One more thing. You do not have to quit your day job to start and run your own business. Quit your day job only if the business cash flow projections are working out favorably for the foreseeable future.

If you see the business picking up but you need to spend more time working on it, take a vacation for a few weeks and run it full-time. Then see if the extra profit was worth the extra time that was spent to earn it.

 

[DonPhillips]

I interviewed with a firm in Austin, TX and a local municipality in 2002. My own company was not an issue. My new employer also had no issue with my own company and my supervisor previously owned his firm also.

When you want your employees to make decisions like they own the company, hiring former owners make sense.

Don Phillips

http://worthingtonengineering.com

 

[powerjunx]

Don,

In that case, hiring former owner, the former will then be probably a consultant.

 

[atlas06]

Don,
I too had my own business outside of engineering 15 years ago. What I learned most was the care, the performance and sense of duty expected of employees by owners. I actually became a better, and more efficient employee. All it takes is to think of it as if it were your own business, and things fall into place.
A former boss hired one previously self-employed engineer, he couldn't stand working for someone any more, he kept bitching about every thing until he got fired.

I guess it goes both ways.

 

[RDK]

Taking a personal loan and then lending the proceeds to your company is different than not having a company in the first place.

A company is a legal fictional “person”. The company is independent from the owners and creditors.

It is this independence that makes it hard for the company to get a loan in the first place. No assets or track record then no credit rating and no loans.

Lending money to your own company or to mine simply makes you one of the creditors of the company. All you stand to lose is the amount of the loan. Your liability is limited to your investment, hence the term limited company.

If the firm is sued for millions then too bad for the winner of the lawsuit as the only recourse is the assets of the company, which includes your loan. If they sue you personally then all your assets are at risk including your house, car, bank account etc.

Get legal advice is setting up your corporate structure and any lending agreements r you could find that the court may rule that the company is only a shield for liability and rule that it does not exist for liability reasons and attack your assets directly. You may also inadvertently create some personal exposure depending on the exact wording of the documents.


Rick Kitson MBA P.Eng

Construction Project Management
From conception to completion

http://www.kitsonengineering.com