Does this make sense

[S T]

Someone recommended a small IT computer consultant that has annual revenues of $45,000 per year to incorporate?

Calif - so would have $800 minimum Corp fee, $ 25 Annual Sec of State filing Fee, plus the cost of Accounting, payroll, etc

Sandy

[dsi]

The recommendation to incorporate could be for other than tax reasons, Yes? I would not make such recommendations, but rather would suggest they consult with an attorney for other than tax reasons to incorporate.

[JohnH]

Someone recommended a small IT computer consultant that has annual revenues of $45,000 per year to incorporate?

Calif - so would have $800 minimum Corp fee, $ 25 Annual Sec of State filing Fee, plus the cost of Accounting, payroll, etc

Sandy

What would be his potential liability if he made a mistake that crashed a hospital computer system or shut down a manufacturing plant for a week and got sued?

[S T]

Liability Issues

I talked with the client regarding liability issues - she is small, main account is a Small Church, and then personal computers - Seems like she should be able to purchase some Liability or ??(type) Insurance that would be a lot cheaper than the cost of converting to a S Corp.

She said the Accountant-Tax person said for saving Tax Dollars. I am not sure I see much in Tax Savings, when she would have to take wages.

??

Sandy

[BHoffman]

Was the "Accountant-Tax" person cutting her hair or changing her tire at the time?

[S T]

Dollars

For the Accountant-Preparer that recommended - I guess it makes sense, they charged the client $ 750 to Incorporate them

Client said she was unsure what to do and to hold up the paperwork, but Preparer went ahead and filed

Even seems liability issues could be mute depending on how you look at it - More installing software, setting up websites, some security issues, setting up backup procedures, etc. I know there is the risk of what she might do that "could" involve a computer crash, but even she didn't seemed concerned about that.

Paperwork(corp) was filed in the last 2-3 weeks in 2011

So now we get to unwind? .

Sandy

[erchess]

Wait a minute

Sandy are you saying that this other tax person went ahead and formed a corp for a client when the client said wait that she wanted to think about what to do? I realize there's probably no referral of the preparer for discipline nor any lawsuit because the preparer will say your client was unclear or the preparer misunderstood. But I think if the preparer has any decency he or she would pay you to fix things. Barring that would it be possible to strip the corp of its assets and gift it to the preparer?

[oceanlovin'ea]

Even if you make a business a corporation on paper, you can file to have it dissolved. A small fee involved for that.
If she doesn't want to be a corp she might just do that.

If she doesn't act as a corporation,, she isn't really a corporation.

Linda, EA

[JON]

Let us say

you work for your own corporation and charge yourself out as a computer expert and you do crash a $1,000,000 system. You are sued for the time down, the damage done and heart attackes to the client's customers employees, plus their attorney fees. Let us hope the insurance covers the couple of million plus, but if it does not the law suit will ber against the corporation and the individual who was the expert. If the Corporation has enough to cover all the damages than the expert employee may be OK, it not hang on they will be looking to you for whatever than can get.

A professional I think in all states can be expected to be sued personally if his services do cause any damages, no matter what business set up you have.

[JohnH]

Not so under your scenario. If the corporation was legally established and all the legal niceties are followed (annual meetings, minutes, separation of personal and business transactions, no commingling of funds, etc) the corp will provide the protection necessary to shield the shareholder's personal assets. In any case, having the corp in the middle will provide a barrier, possibly enough of a barrier to discourage an attorney from trying to pierce the veil.

The key element isn't really the size of the claim, but rather what personal assets does the shareholder have and what is it worth to try and protect them? I don't see incorporating as a fool proof method of asset protection, but the neither is insurance. After all, if you've ever seen a situation that involved punitive damages, you'll know tha most insurance comapanies will quickly advise the customer they aren't covered.

We also havent touched on the simple matter of business affairs going south throught no fault of the owner and having to declare corporate bankruptcy. Sure is nice to have that protection against unsecured creditors if that situation develops. Incorporating the business is just another type of insurance policy for the shareholder's personal assets. Trying to build a wall between them and the claims of all sorts of potential creditors & other parties of unknown origin.

[Gretel]

I agree with the other Jon. There are at least two possible kind of law suits. Once resulting from "professional" judgement mistakes, for which the corporation doesn't give any protection (only as far as assets are available in the corporation but that holds true for all law suits).

The other one is if f.e. someone gets hurt on your property and it has nothing to do with you as a professional. In this case the corporation shield is of value.

However, what I am not sure about is if an IT person is included in the list of "Professionals". I know I am and you all are, and doctors etc.

[JohnH]

I doubt an IT professional would come under the special rules reading Professional Corps which apply mainly to Doctors, lawyers, accountants, architects, etc. Maybe someone else can clarify, but I think the IT professional would be well protected by a properly managed Corp. There may be other reasons to do or not do it, but corp limited liability would certainy be a plus.

[Gary2]

There are other reasons why an IT professional might want an S Corp, though they probably don't apply in this case.

One is that some companies hiring independent contractors are concerned about them being classified as employees. Thus they're more likely to hire independents through other corporations, and won't look upon an LLC the same way. Whether or not their concern is justified isn't really relevant; having the "Corporation" as part of the name is a selling point.

The other, which is even more of a stretch, is that a software consultant who also creates a software product for sale, could be in a better position for financing and/or acquisition. At least that's a common belief in software consulting circles. I don't know enough about it to substantiate it.