Medical Malpractice

This article is one of a series, collectively titled "The Dirty Dozen: Mistakes That Could Ruin Your Business." Making these mistakes can be very costly in both time and money, but all of these possible mistakes can be easily avoided by some advance knowledge and planning ahead. Although I think the information in this series of articles can be very valuable to home business operators, it is very important for you to know that I am writing this series of articles solely from a "lessons learned" perspective. I am not a legal, tax, or accounting professional. You should consult an appropriate professional for detailed advice that is specifically relevant for you and your business.

In this article, I am going to discuss the potential problem areas of setting up your home computer business identity and not carrying adequate insurance.

Let's start with properly setting up your home computer business identity. No clue what this means? Welcome to the club! It was all pretty much a mystery to me when I got started running my own business.

The situation is basically this: your business must have its own "self," just like you do. But here's the difference. You didn't get to choose who you would be, select your own name, etc. You can (and must) make all those choices for your business.

To begin with, you must decide what kind of legal and tax identity your business will have. There are two big possibilities: a sole proprietorship, or a corporation (Inc. or LLC). Each of these possibilities has advantages and disadvantages, which may vary a lot based on your own tax situation, your expected business income, and even the state in which you live (in the United States).

Many, perhaps most, small businesses are operated as a "sole proprietorship." This essentially means that you are the "only owner" of your business. It is usually the easiest type of business to set up, and it generally requires no "set up" costs other than perhaps a business license if your local government (city, county, etc.) requires you to have one. Under a sole proprietorship, you and your business are seen as being one single entity. All business records will include your name, your Social Security number, etc. Your personal income (say, from your existing job) and your business income will be counted together when you do your taxes, which minimizes number of IRS forms you need to fill out.

However, one of the big reasons that some business owners invest the time and money to set up a different type of business ownership is precisely because, in a sole proprietorship, you and your business are regarded as a single "being."

Here's one potential problem with that type of business identity. Let's say you own a little ice cream shop, and you operate it as a sole proprietorship. You're not making a huge amount of money after expenses, but it's working, and it's getting better week by week, and you have actually set aside $10,000 in profits.

Then, one awful day, little Joey comes in, slips on melted ice cream you haven't wiped up yet, gets a complicated break in his right arm, and the fall gives him a concussion. You could be responsible for the costs of all of that -- Joey's hours in the emergency room, the consultation with pediatric neurosurgeons, the orthopedic surgeon who specializes in setting really bad bone fractures, Joey's X-rays, his MRI and CAT scans, his two days in the pediatric intensive care unit - I think you can probably add even more. And that is all hoping that Joey's mother doesn't sue you for negligence (being careless or irresponsible) in addition to paying for all of his medical bills!

Those costs could burn through your $10,000 in profits in a couple of days - and that's not even the worst of it. Because you and your business are seen as one entity in a sole proprietorship, you and your business share both income and liabilities. That could mean that after you have spent your $10,000 in business profits, you could be required to start paying the rest of Joey's medical costs with your "own" money. In effect, all of your personal income and assets could become vulnerable to being used to cover your business costs.

It doesn't even have to be a big dramatic situation like little Joey to create big problems for you. What if you ordered a gigantic amount of ice cream for the summer, and it rains most of the time from June until September? Your business income will probably go way down below what you expected, and your profits may not be enough to cover the cost of all that ice cream that is still in your freezer - not to mention that you're having trouble covering your store rent and utilities with only a few people buying ice cream in a rainy summer. Same problem. After you've used up your saved $10,000 in profits, you could be required to use your own savings etc. to pay those bills.

Pretty scary, huh? Now, admittedly, those are pretty extreme made-up examples. But the point remains. In a sole proprietorship, your personal assets can be taken to cover your business expenses.

Enter corporations. A huge difference between designating your business as some type of corporation vs. a sole proprietorship is that your incorporated business is seen as being a separate entity from you and your personal income and assets. To make this seem more real, consider again little Joey and his accident in your ice cream store. If your ice cream business was set up as a corporation, Joey's medical bills would belong to your corporation - not you personally. Then when you used up your $10,000 in corporate assets to pay his bills, your personal assets could be protected from being taken to cover any of Joey's remaining bills. Same thing with all the ice cream from the rainy summer. Even if your corporation owes money to your ice cream supplier etc., those people cannot take your personal assets to pay your corporation's bills.

As an internet entrepreneur, you are probably way less vulnerable to physical injury and unsold merchandise problems than "real business" owners are. So it may make perfectly good sense to start your home business as a "paperwork-simple" sole proprietorship. The important thing here is to be aware of alternatives and get good professional advice about the best choices for you. And do it before your business is already well underway - playing catch-up is no fun - especially when it involves tax and legal issues.

Get help here:

www.score.org

SCORE (Service Corps of Retired Executives) is group of (guess what?) retired executives who will share their years of experience and expertise with you, for free!!

One more time, please remember that what I am giving you here is only my personal understanding of these topics. I advise you to get professional assistance.

Not Carrying Adequate Insurance

Back to little Joey and his ice cream disaster. If you had bought liability insurance for your ice cream shop, probably your insurance company would have paid a good part of little Joey's medical bills - and helped defend you against a negligence lawsuit if Joey's mother decided to sue you.

Again, you will not likely have a "Joey" experience as an internet business owner, but you still could find yourself in a situation where someone is claiming that something you did cost them time, money, inconvenience, pain, etc., and they want you to pay them for it. Just think about all you hear about malpractice suits against physicians.

To help protect themselves against similar lawsuits, many professionals who sell their ideas, advice, or expertise (think accountants, attorneys, business advisers, etc.) carry a specialized type of insurance called "Errors and Omissions" (E&O). Discuss this with your insurance agent.

If you expect to have business clients visiting you (either in an office away from your home, or in a home office), you should think about liability insurance. Your basic homeowner's insurance may or may not cover people who come to your house as clients of your business.

Guess what I'm going to say now? Yep! Be sure to consult with an insurance professional to find out exactly what you need to protect yourself and your business.