To sell or not to sell...

[AliOop]

@JoyfulSudz I believe @paradisi's post filled in most of the blanks I didn't mention earlier. To expand upon that, the problem is in most states, even if you win and get their case dismissed as being unmerited, you still have to pay for an attorney to defend you. It is often the attorney fees, not the monetary award, that breaks the small business person. We are talking a minimum of $20k and often closer to $150k to defend an average product liability lawsuit. Even if your state does grant attorney fees to the winner, you still have to front those costs until the all the dust has settled - including any appeals of the judgment -- which can take several years.

If you have that kind of $$$ lying around to use to pay an attorney, then you probably have other assets you'd like to protect from a potential judgment, as well. Hence my recommendation purchase good insurance -- to cover the cost of defense and any potential judgment -- before spending anything on any type of corporation formation, whether LLC or S-corp.

 

[Feelin' Soapy]

@AliOop Thanks for the detailed explanation. I don't disagree about the need for insurance. But I struggle with the litigiousness of our society and attempts to find blame with others for everything that goes wrong.

My hair dryer actually has a little tag on it warning folks not to use it in the shower!

 

[AliOop]

@AliOop Thanks for the detailed explanation. I don't disagree about the need for insurance. But I struggle with the litigiousness of our society and attempts to find blame with others for everything that goes wrong.

My hair dryer actually has a little tag on it warning folks not to use it in the shower!

I hear you...as an attorney, it makes me sick what people have to spend in order to fight back against those with a victim mentality, get-rich mentality, etc.

If you ever need a little humor on the subject, listen to comedian Bill Engval's original "Here's Your Sign" routine.

Edit: Just looked it up and found it (of course) on YouTube here.

 

[~Dragonfly~]

So, if I'm in California where it's $800 for an LLC, and I know I'm not going to be selling that much soap, could I just get insurance and call it a day? What am I leaving myself open to if I don't get an LLC?

 

[Catscankim]

Great Info. Is this insurance private & for soapers? hope thats not a stupid Q. .

I originally thought I was buying through Geico, which was my car insurance at the time, but I was redirected to Hiscox from Geico's website

 

[AliOop]

So, if I'm in California where it's $800 for an LLC, and I know I'm not going to be selling that much soap, could I just get insurance and call it a day? What am I leaving myself open to if I don't get an LLC?

For most people, especially those selling small amounts of just soap (as opposed to lotions or shampoos, which have lots more risks), paying for good insurance is probably going to be enough.

Still, check with your CPA to get personalized advice for your situation. While it may cost you $150 for a consultation, it is worth every penny to make sure all factors have been considered before making a decision.

 

[ScentimentallyYours]

All this talk of liability for those of us who want to give soap away makes me think I should go back to working on dichroic glass pendants. Glass is similar to soap in working with colors that blend together and can be unpredictable surprises when they come out of the kiln. The downside is I cannot scent the glass. I love fragrances in soaps, even the scent of the unscented soaps with beeswax. That’s why I’m making soap! Guess I’ll go check out insurance.

 

[AliOop]

All this talk of liability for those of us who want to give soap away makes me think I should go back to working on dichroic glass pendants. …

Guess I’ll go check out insurance.

It is far less of an issue when you give it away rather than selling it. Selling creates much higher liability, just like renting out your spare bedroom creates greater liability than having a friend stay over for a few days as your non-paying guest.

 

[Spice]

@TheGecko And that's exactly my point -- whatever happened to the concept of personal responsibility!

Cant make calms it’s health, cant make cams it moisturizes, cant make calms it feels wonderful, so I just calm Cleopatra used it first. I calm the history of soap. The FDA will at some point come after all the soapers

 

[ScentimentallyYours]

It is far less of an issue when you give it away rather than selling it. Selling creates much higher liability, just like renting out your spare bedroom creates greater liability than having a friend stay over for a few days as your non-paying guest.

Thank you for that clarification, @AliOop! I appreciate your advice and your posts.

 

[Catscankim]

Cant make calms it’s health, cant make cams it moisturizes, cant make calms it feels wonderful, so I just calm Cleopatra used it first. I calm the history of soap. The FDA will at some point come after all the soapers

So you are the one selling the alluring perfume on Facebook that claims it is an ancient recipe from Cleopatra

Joking...

 

[cmzaha]

So, if I'm in California where it's $800 for an LLC, and I know I'm not going to be selling that much soap, could I just get insurance and call it a day? What am I leaving myself open to if I don't get an LLC?

I sold in California over 10 yrs and fortunately had no issues. Well, one when a child ate a marshmallow soap but there were warning on every side of the label. The mother decided not to pursue the issue. I had my insurance through The Guild and paid for the upgraded liability since I sold lotions and soaps. I did not go with an LLC since my experience, even with impeccable records, after having two S corps I found not a huge amount of protection, so I made the choice of going with good insurance. My little business just was not worth the extra work of following the rules of a corp whether an LLC or not. But that is me. This choice was not because I had nothing to lose and I know full well how much lawsuits cost.

 

[AliOop]

I sold in California over 10 yrs and fortunately had no issues. Well, one when a child ate a marshmallow soap but there were warning on every side of the label. The mother decided not to pursue the issue. I had my insurance through The Guild and paid for the upgraded liability since I sold lotions and soaps. I did not go with an LLC since my experience, even with impeccable records, after having two S corps I found not a huge amount of protection, so I made the choice of going with good insurance. My little business just was not worth the extra work of following the rules of a corp whether an LLC or not. But that is me. This choice was not because I had nothing to lose and I know full well how much lawsuits cost.

Thank you for sharing your real life experience- it's a perfect example of what I was trying to say, which is: good insurance beats incorporation, almost every time.

My husband's experience was this: S corp, perfect records, zero commingling. He still got sued personally due to a subcontractor's failure -- because that's what folks do to try to scare you into settling. Fortunately, he had decent (not great) insurance... plus an attorney wife who was pretty fired up and got him dismissed early by threatening a countersuit for frivolous litigation, given that there was absolutely ZERO basis to sue him personally.

Edit: I will add that in this case, having an S-corp was actually vital to protecting us. My point, however, was that the mere existence of the corporation was not enough to stop someone from attempting to sue my husband personally. That being said, he was a general building contractor, which is a very different business than soapmaking. In Cali, the GC is liable for 10 years from date of completion of the entire project, not just for his own work, but also for everything any of the subcontractors may do, or any defective product that was innocently installed. So that's an example where an S-Corp or LLC would be highly recommended. Not so much with small soap makers who are pretty much only liable for their own products.

 

[Zany_in_CO]

I sold in California over 10 yrs and fortunately had no issues.

Same here.

I wanted to enjoy my hobby as just a hobby. I gave a lot of soap away, but now people are asking to buy it.

This is just me but I never needed insurance or a license to sell. I kept my hobby a hobby and it never became "a business" because I knew that would be too stressful -- been there, done that.

When I talked to our CPA, he said I could make up to $3,000 a year without having to report the income. It would fall under the category of "Casual Sales" as in selling your car to a private buyer.

The first 4 years, I sold soap & other B & B products to friends & family and at my annual garage sale which brought in another $350 - $500 every year -- enough to cover supplies for the next year. And so began the vicious cycle. LOL

My hobby has supported itself since Day 1!

I put all my expenses on a dedicated credit card and opened a dedicated checking account to track income and expenses -- an easy bookkeeping system for making and selling stuff on a casual basis. At the end of the year, the balance in my checking account was my profit for the year.

It wasn't until I was approached by Soapmakers on the Group I was in who needed someone to make product for them to keep up with demand that I started reaching my $3,000 limit. WOO HOO! My thought was to use the money for vacation, but, more often than not, it went to pay for a new water heater, AC, roof, etc. There was always something!

If I were starting out today, I would invest in a "Personal Card" vs. "Business Card" with my name and contact info on the front, i.e., my email and phone number. I'd list my products on the back.

Although I sold soap "naked" at first, and did well, I later developed a Cigar Band Label that had contact info, ingredients, net wt., and coded date of manufacture clearly listed. The code I used was a 6-digit one, i.e., today's date is 102521. This comes in handy if any questions arise. For example, if you make and sell lotion you may want to put an expiration date such as "6 months from date of manufacture" on it.

 

[cerelife]

@AliOop Thank you for all the great advice!!
When I decided to create a business I went to our accountants for help and advice on how to do so. Insurance was a must (I have mine through the Guild), and they recommended against an LLC in my case. The reasoning behind this was that even if I kept meticulous records per my funds, I would almost certainly be named personally in a product liability lawsuit as the sole creator/maker of my products. This conversation was several years ago so I don't remember it verbatim but to paraphrase: "Liability lawsuits tend to go after the deepest pockets. Your personal assets are far greater than your business assets so it's extremely likely that you would be named as the person who made the product in question, and having an LLC isn't going to protect you at all in this scenario."
This makes perfect sense to me, but I've seen many people on this forum and elsewhere (including IRL) who disagree with this idea.
I think you may have cleared this up in the prior post about your husband, but could you please clarify if the advice I received was valid?
Thank you again for all your great advice!

 

[Peachy Clean Soap]

I originally thought I was buying through Geico, which was my car insurance at the time, but I was redirected to Hiscox from Geico's website

Thank you

 

[AliOop]

@AliOop Thank you for all the great advice!!
When I decided to create a business I went to our accountants for help and advice on how to do so. Insurance was a must (I have mine through the Guild), and they recommended against an LLC in my case. The reasoning behind this was that even if I kept meticulous records per my funds, I would almost certainly be named personally in a product liability lawsuit as the sole creator/maker of my products. This conversation was several years ago so I don't remember it verbatim but to paraphrase: "Liability lawsuits tend to go after the deepest pockets. Your personal assets are far greater than your business assets so it's extremely likely that you would be named as the person who made the product in question, and having an LLC isn't going to protect you at all in this scenario."
This makes perfect sense to me, but I've seen many people on this forum and elsewhere (including IRL) who disagree with this idea.
I think you may have cleared this up in the prior post about your husband, but could you please clarify if the advice I received was valid?
Thank you again for all your great advice!

You absolutely did the two best things: talk to your tax professional about your specific situation, and buy insurance!

I can’t possibly disagree with your professional’s specific advice for you, since I don’t know all the ins and outs of your business, finances, local and state laws and regulations, etc. The risk-benefit evaluation is so personal to each situation.

In our case, while the existence of the corp did not stop them from naming him personally as a defendant, it did stop them from getting a judgment against him personally, or even a settlement from him, and we did get him dismissed from the suit without having to go through the entire thing. He did have up to 12 employees at any given time, however, so he was not the sole actor within the corp, either.

Bottom line, if you trust your professionals, and have laid out all the facts of your situation to them, then going with their advice is best. Everything you said that they said sounds reasonable given what you shared here about your situation. You can and should check back with them every so often to make sure that the laws or the general liability climate haven’t changed, which could affect how they advise you.

 

[Peachy Clean Soap]

You absolutely did the two best things: talk to your tax professional about your specific situation, and buy insurance!

I can’t possibly disagree with your professional’s specific advice for you, since I don’t know all the ins and outs of your business, finances, local and state laws and regulations, etc. The risk-benefit evaluation is so personal to each situation.

In our case, while the existence of the corp did not stop them from naming him personally as a defendant, it did stop them from getting a judgment against him personally, or even a settlement from him, and we did get him dismissed from the suit without having to go through the entire thing. He did have up to 12 employees at any given time, however, so he was not the sole actor within the corp, either.

Bottom line, if you trust your professionals, and have laid out all the facts of your situation to them, then going with their advice is best. Everything you said that they said sounds reasonable given what you shared here about your situation. You can and should check back with them every so often to make sure that the laws or the general liability climate haven’t changed, which could affect how they advise you.

Your one smart cookie .

Update: This is random. Speaking of cookies' I ordered the polkadot bags that you had posted a picture of showcasing your wrapped soap a while back. i'm excited to get them.

 

[AliOop]

Your one smart cookie .
Update: speaking of cookies' I ordered the polkadot bags that you had posted a picture of showcasing your wrapped soap a while back. i'm excited to get them.

Awww thanks Peachy! We all have our own areas where we know a bit more… or less. Hope you love the bags as I do!

 

[cmzaha]

@AliOop Thank you for all the great advice!!
When I decided to create a business I went to our accountants for help and advice on how to do so. Insurance was a must (I have mine through the Guild), and they recommended against an LLC in my case. The reasoning behind this was that even if I kept meticulous records per my funds, I would almost certainly be named personally in a product liability lawsuit as the sole creator/maker of my products. This conversation was several years ago so I don't remember it verbatim but to paraphrase: "Liability lawsuits tend to go after the deepest pockets. Your personal assets are far greater than your business assets so it's extremely likely that you would be named as the person who made the product in question, and having an LLC isn't going to protect you at all in this scenario."
This makes perfect sense to me, but I've seen many people on this forum and elsewhere (including IRL) who disagree with this idea.
I think you may have cleared this up in the prior post about your husband, but could you please clarify if the advice I received was valid?
Thank you again for all your great advice!

This is the problem they go against you personally. I also was in a partnership in a C-Corp, which also gets really ugly. I chose to carry a huge umbrella policy to cover my personal assets, etc, and the higher-end Guild insurance. It was not cheap, but I was a member and carried my policy through their underwriter from day 1 of selling. If you start fooling with your homeowner's insurance for insurance you have to be very careful they do not consider you a manufacturer, which can get really ugly.

I ran into this issue when our State Farm Agent sold and one of his office gals told the new agent I make and sell soap. His comment was we will have to talk about my manufacturing soap at home. Fortunately, at the time we still had our shop and I informed them I do not make it at home but in our shop, he dropped it. So you can risk losing your homeowners insurance. This was the house I recently sold that I could barely get insurance on due to being a stilted hillside home, so I could not afford to lose my insurance.