When is Incorporation a Good Idea?

[parrythis]

In addition to fencing, I fly radio-controlled airplanes. The small club that I belong to (and am an executive board member of) elected to incorporate a long time ago. Even though the club and its members are covered by insurance provided by the the AMA (Academy of Model Aeronautics) they decided to incorporate in order to establish themselves as a not-for-profit organization and also to provide a layer of legal protection for their officers and members. From what I can tell it is not a big deal to do so.

My understanding is that if an organization is incorporated, its officers and members cannot be sued individually. If the organization is not incorporated, the officers and members can be sued and their personal assets may be at risk. Please correct me if I am wrong.

My question is whether incorporation is a good idea for divisions and/or sections of the USFA. Are any divisions incorporated? For the legal experts that participate here, is incorporation a good idea? If so, what type of incorporation would be appropriate?

[Allen Evans]

**Insert all the disclaimers about my lack of a legal degree, and that this message DOES not constitute a legal opinion, but is only my own, based on experience, and discussions with my own attorneys**

Being incorporated gives you only SOME legal protection. Being incorporated gives you -- as an individual -- protection in the case of bankruptcy of the corporation, and a few other things. It will not prevent a suit based on, say, gross negligence, or criminal behavior (for instance, executives of Enron were individually prosecuted for crimes related to the activities of the corporation).

With all that said, I have always urged the fencing clubs I was a member of to incorporate, either as a non-profit, or a for profit club. It makes sense for Divisions and Sections to incorporate as well. There are many more benefits than just creating a layer of legal protection.

AE

[Craig]

Would a few posts explaining Sole Prop vs. LLC vs. Corp be in order?

Craig

[oso97]

Originally Posted by Craig

Would a few posts explaining Sole Prop vs. LLC vs. Corp be in order?

Craig

yes.

[Craig]

I'll see what I can pull together from a subject matter expert.

Craig

[Philistine]

As a general matter, corporations (and limited liability partnerships) can be used somewhat as a shield against individual liability. However, no corporate form will shield someone from personal liability for their own acts. Especially, when it's a small entity (like a fencing club), what can be considered "your own acts" of the "owner" or person in charge can often be broader than many people expect. For that reason, IMHO you're probably better-off using insurance for liability protection, if that's your main concern.

Corporations and LLP's (and similar entities) are better at protecting individuals from contract actions (debts, etc.) as generally the corporate entity is the one who is liable, rather than the individual. Again, there are exceptions--particularly where the business has a corporate form, but for all intents and purposes is run as if it were a sole proprietorship (personal assets intermingled, no corporate forms observed, etc.).

Also, the different business forms have very different tax treatment.

**NB** this is all a very broad generalization (and not my main area of expertise, anyway )--different states do it in somewhat different ways, and often have different types of entities available with slightly different treatment.

--Philistine

[noodle]

in general:
sole proprietorships (SPs) are treated identically as you are. it would be the same as if you were a contractor working for someone else, with no benefits, special taxing rules, or liability shielding, etc..

limited liability corporations (LLCs) are treated as corporate entities. there is extra paperwork and overhead associated with keeping up with them. they're typically taxed differently. in general, they provide a liability shield, which prevents personal assets from being touched (unless you did something bad as an individual).

[parrythis]

Originally Posted by noodle

limited liability corporations (LLCs) are treated as corporate entities. there is extra paperwork and overhead associated with keeping up with them. they're typically taxed differently. in general, they provide a liability shield, which prevents personal assets from being touched (unless you did something bad as an individual).

Yes - I think that's what I'm looking for.

Imagine the following scenario:

The division organizes a tournament. The owner of the venue gets miffed about something (people left marks on the gym floor, for example) and decides to sue the organizers.

It occurs to me that without the LLC, the owner would be suing the individuals that organized the tournament. With the LLC they could sue only "the division" as the legal entity that rented the venue.

Am I understanding this correctly?

Note that my example specifically excludes a scenario in which some kind of insurance from the USFA would be the answer, but even that is a concern as a truly litigious individual could easily sue for more than the insurance coverage is for.

[noodle]

Originally Posted by parrythis

Yes - I think that's what I'm looking for.

Imagine the following scenario:

The division organizes a tournament. The owner of the venue gets miffed about something (people left marks on the gym floor, for example) and decides to sue the organizers.

It occurs to me that without the LLC, the owner would be suing the individuals that organized the tournament. With the LLC they could sue only "the division" as the legal entity that rented the venue.

Am I understanding this correctly?

Note that my example specifically excludes a scenario in which some kind of insurance from the USFA would be the answer, but even that is a concern as a truly litigious individual could easily sue for more than the insurance coverage is for.

i'm not a legal expert, but given the example, the venue would be suing the USFA.

[reawl]

RCF, my club, was formerly a SP. It made sense for me to run it that way since it was in its infancy. Now the club is more stable, more mature, and I'm looking to hand it off to the members to care for it. The incorporation facilitates that very well since nothing is tied directly to me, changing officers is a bit more seamless in terms of bank accounts, etc.

Also with the non-profit part, the public schools are much more willing to let us advertise and to loan us space. I imagine the same would hold true with other community minded organizations as well.

Plus we get all that legal stuff too ;-)