Step One on the Ladder: The Operating Business Entity

• Author: Jeffrey Robert Matsen
• Profession: Founder and managing partner of Matsen Voorhees Mintz LLP
• Pages: 23-28

23

CHAPTER

5

Step One on the Ladder

The Operating Business Entity

One of the first important decisions a business owner or practicing professional must address is selecting

the proper form of business entity. This is a crucial decision because of its ongoing legal and tax conse-

quences. Liability protection is the most important nontax consideration in the business-entity-selection

process. Business owners need a shield or umbrella covering their business activities in order to protect

their other non-business assets from liability exposure. These claims are the kinds of “Inside Debts” we

defined in Chapter 1. They are the claims that are directed to and arise from the business operations itself.

No prudent business owner in our litigious, deep-pocket-searching society can afford to operate without

either incorporating or establishing a Limited Liability Company (LLC). The Sole Proprietorship or Gen-

eral Partnership mode of doing business is a thing of the past.

Let me give you an example. A few years ago, a Latino family that operated three Mexican restau-

rants as more or less a mom-and-pop type of operation was referred to our firm. They were basically

facing two different kinds of claims: one, from a customer who allegedly slipped and fell at one of the

restaurant locations, and another from a former employee who was alleging sexual harassment.

Unfortunately, the location at which the slip-and-fall incident occurred was not properly insured

at the time because of an inadvertent oversight between the owners and the insurance broker. All three

restaurant locations’ assets were subject to liability from the customer’s claim. If this entity had been

incorporated instead of being operated as a proprietorship by the family, then only one restaurant might

have been the subject of the claim, and the liability potential could have been greatly limited. We were

able to successfully negotiate a settlement with respect to the suspicious slip-and-fall claim, and the family