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Should I register as a sole proprietorship or LLC?

Irvine, CA |

I am starting a bakery from home business. As a part time student as well, less than $3000 a year income as of right now, and not many personal assets, I was all set to register as a sole proprietorship. But, doing more research I was thinking about the consequences if someone attempted to sue (since it is a food business-people like to claim they have food poisoning sometimes to go after companies). Then again, I could be protected under liability insurance right? Any suggestions would be appreciated. Thank you!

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Attorney answers 3


Having adequate liability insurance coverage is much more important and much more useful for your business.

Keep in mind that you will have to incur attorney's fees and costs to set up the LLC, plus pay the $800 to the State of California each and every year.


Also know that if you inadequately capitalize the LLC, which it sounds like you may be forced to do, an LLC could be pierced and thus your personal assets could be exposed. This would put you back in the same situation you are in now. I agree with Counselor Chen, spend your money on insurance.

Justin C. Lowenthal, Esq.

Disclaimer: The content of this response has been prepared for informational purposes only and should not be construed as legal advice. The material presented is not intended to create, and receipt of it does not constitute, an attorney-client relationship, and readers should not act upon it without seeking the advice of independent professional counsel.


Yup. If you started an LLC to shield yourself from damages in a lawsuit, and if you did not have adequate insurace and capital to pay a reasonably foreseeable judgment, a court would allow someone with a judgment to scoop up your individual assets on the grounds that the social policy that allows companies to limit their exposure is not intended to reward irresponsible behavior. For example, if your bakery buys a delivery truck and hires a driver, and the driver hits a kid in a crosswalk while drunkenly delivering your donuts, and you did not buy auto insurance because you figured you'd just put the LLC into bankruptcy if you got sued, the kid would out of luck unless the court wiped away your shield. Under the circumstances I described, you can bet that the kid would clean your clock. There are many good reasons to form an LLC, but it doesn't sound like something you can afford yet and you'd probably be better off in the short term buying comprehensive liability insurance for the bakery. I'd have to know a lot more to be sure, but in general, I think my advice is sound. Good luck. I love small business creators like you. They are the backbone of our economic system.

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