A lot of 1099 contractors forego the opportunity to become a legal business entity. Government Contracting Academy founder, Randy Wimmer, is frequently asked “Why pay to become a 1-person company when I can just file as a 1099 contractor? It’s a great question with an answer that may save everything that you have! Here’s a real example that illustrates the importance of establishing a legal company.
Randy’s wife and a colleague started a clever business where they would invite nationally-known artists to a venue where students would pay to learn from these artisan “masters” during a fun, artistic retreat. They were very successful and had a blast. Some of the artists used potentially dangerous mediums, such as glass, wires and even heating torches.
By operating through a legal corporate entity, our families were protected from the “what if” scenarios. What if a student snipped a wire, and it popped up and got lodged in a student’s eye? What if one of the students left their heating torch on and caught the tablecloth, then the table, then the entire room on fire? What if one of the nationally recognized artists had an unknown checkered past and acted inappropriately towards a student? These were all potential liabilities that my wife and her business partner faced.
In each case, there was a tremendous likelihood of a lawsuit. If my wife and partner were not operating through a legal company, then both of their families would most certainly have been the entities sued. Their savings, their homes and all their assets would have been put at risk had a student, who just happened to be a surgeon, lost the vision in one of their eyes by a snipped piece of wire during a retreat. Both families could have lost everything.
Fortunately, they were operating through a Limited Liability Company. Had one of these horrible “what if” scenarios happened, then the worst-case scenario would be a lawsuit against their company. Since their company, at most, only had a few thousand dollars in assets, it would have been sued out of existence. This would have been unfortunate, but it would have left both families still living in their homes with all their assets fully protected.
In today’s litigious society, doing any work with the limited liability protection of an employer or your own company is simply ludicrous. Hopefully, this example has directed your decision-making process from “if” to “what type” of legal corporate entity you wish to establish.