Enjoy the following excerpt from my FREE What You Need to Know About Starting a Business course where I talk about what you need to know about registering an entity with the Secretary of State.
Video Transcript (Edited for clarity)
Why do we register an entity in the first place? Because when somebody wants to sue you and your company is called ABC plumbing, I got to figure out who I’m going to serve those papers to. It’s not to protect your liability. It’s to associate the name of your business with the person I’m going to serve. That person is what we call a Registered Agent. That registered agent can be you, it can be your lawyer, or it can be a company that acts purely in the capacity of being a professional registered agent.
I own residential real estate in the state of Virginia. I do not live there. As a result, because real estate tends to be a little bit more litigious, I have a lawyer as my registered agent in Virginia. So when one of my tenants wants to sue me for whatever reason, maybe for not returning their damage deposit because they trashed my apartment, and they think they’re going to take me to small claims court, guess who they serve? They serve my attorney which means that if they’ve hired an attorney the first thing their lawyer says is:
“We’re not going to be able to bamboozle this guy, he’s already lawyered up. If you want to go forward, you’re going to have to pay me money to represent you or you are going to have to do it yourself because I’m not going to take your case on a contingent basis. After all, quite frankly, he’s going to get good advice from his lawyer and I’m not going to be able to intimidate him with a letter saying we’re going to sue youand he’s not going to simply cower and write me a check, that’s not going to happen.”
So, you may actually avoid ever being sued by actually having a lawyer as your registered agent rather than you. If I’m going to sue your business, the first thing I might do is go one of these ambulance-chaser lawyers you see on TV, and since I’m on camera I won’t use any names here today. One of the first things they’re going to do is to instruct their paralegal and look up the business owner to see what their net worth is. They don’t really care whether you’re going to be able to win this case at this point because quite frankly it doesn’t matter whether you win or not it’s whether you can get paid at the end of the day.
I’ve won many legal cases in court but if I can’t collect it’s not worth it. So, the first thing the lawyer is going to do is do some investigation to find out who the owners of the particular business are. If you are the registered agent then they can determine through a business-to-consumer database or the lifestyle database what your house is worth, how much money do you make, etc. The lawyer can make a determination right then and there whether they are going to take this case or not based upon public information and say:
“I’ll take this case as a contingent basis because at the end of the day this person’s worth millions and I’ll take it to court. I think we’ll be able to win or get a settlement. Being lawyered up or not doesn’t really matter because in all likelihood he’s got insurance and the insurance companies are going to settle. All right so I’ll take your case.”
So, by actually putting yourself down as the registered agent it exposes you to the potential of an individual lawsuit where a lawyer kind of creates that lawyer-client privilege separation and the plaintiff and their lawyer don’t really know who you are.
You can however give that all away when you put on your Facebook that you’re the owner of that particular business. If you look at my social media profiles and for any of my businesses it says something like I’m a content creator or I’m an investment manager. It doesn’t say that I’m the owner. After all, I don’t want anybody to make those associations between me and my business because I’ve got either a company that acts as a registered agent or a lawyer that represent my business as a registered agent. Now for some businesses, I am the registered agent since it really doesn’t matter for them because these entities are not a very litigious environment.
Next, I’d like to discuss limits to personal liability which many people get wrong. They think they can just go out and create a limited liability company so they can get free reign to do whatever they want. This is false. If you’re the manager of a company you have additional personal culpability if something goes bad.
Who’s Bernie Madoff?
Where’s he?
He’s in jail.
He was the owner and decision-maker at his company. Kevin Bacon was just an investor in Bernie’s business.
Where is he?
Still making movies.
There’s the difference. If you have a limited liability company and if I’m an investor in your particular business but I’m not making management decisions, my liability is protected. But as soon as I start making management decisions others can hold me accountable and sue me personally.
So, the whole reason that we create this whole concept of limited liability is that liability protection extends to people who are not managers in that business. You would never be able to sell stock in your company or get a limited liability partner to be a partner in your business if they could get sued for a decision you made.
If at the end of the day they have the ability to drill down and see that I’m the founder but that I have no money and my partner has a lot of money because he’s the money guy, that lawyer is not going to go after me, he’s going to go after the money guy. The lawyer is not going to collect anything for me because I’m am hundred percent invested in the business, but that money guy, he’s got stakes in lots of different businesses. The lawyer is going to go attack him. If there was no liability protection for non-managers that money guy would never invest in any business.
So limited liability entities such as LLCs and Corporations were created to provide protection for people who are investors but not involved in day-to-day management. So, if you’re going to create a limited liability entity and you’re listed as the registered agent it is a good possibility you are the owner/manager and that you have additional culpability.
Where do you go to register your entity? You go to the Secretary of State and it cost $50 in Colorado. When you go online to register you probably can answer any of these questions yourself as you fill out the registration form. You don’t need to pay somebody to do it except if you want that lawyer to be that registered agent.
Quite frankly I do it myself. I call my lawyer and I say:
“Listen would you be my registered agent?”
and he says “Sure”
“What are you going to charge me? $50 or $75?”
My guy in Virginia charges $75. He doesn’t do anything for that $75 by the way. He just gets mail if I ever get sued which doesn’t happen that often anyway. Quite frankly the only thing he does is call me to say,
“Guess what, we just got served”
He did his job for $75. But I created the entity I did all that work for him so I didn’t have to pay him to register the entity, I just made him the registered agent.
So that registered agent now becomes the person that they’re going to serve and that sets up a persona to all those ambulance chaser lawyers who are considering representing a plaintiff thinking about suing my business. They see that the business is already lawyered up and it represents another degree of separation between me and the business.
So, to renew your entity each year you go to the Secretary of State to reregister, and it cost $10 in Colorado. Each year you just validate what’s there and you send it in again, pay your $10 and you’re done.
As a derivative of the registration process, no two companies can have the exact same name because if there were two businesses named ABC plumbing, we would not know where to go to find the registered agent. So, many people think the real reason to register a business is to secure the name, but it’s not, it’s just a function of the system.
I’ll be honest with you, there is a lot of this stuff that you probably think you know about small business but it is just a perverted idea based upon something that is misunderstood in general.
The Internal Revenue Service is where you get a tax ID number. You have a tax ID number; it is your social security number. But if you’re dealing with other businesses you don’t want to give them your tax ID number. If you have employees you don’t want to put your social security number on all of their paychecks and everything. You want to go ahead and have a separate tax ID number. It’s free to get it from the IRS. But like anything that you get from the government it associates that there’s now an obligation on your part that at some point there’s going to be a tax return related to that tax ID. So now just like you have the social security number there’s going to be a schedule associated with that tax ID that you’re going to have to file.
