I just received an investment

[TMA]

My internet company just received an investment of $15K. I am currently a sole-proprietorship. I am giving the investor 20% of the profits and will give him 75% of the sale of inventory if my store closes. I invested about 10K in inventory. Also I have an option of buying out my investor for $15K. How does all this work with taxes? Do I need to incorporate? I haven't incorporated because I don't really have any assets. Also, can a creditor sue me personally and get any of the money from this investment if it is all tied up in inventory?

Thanks,

Amy

[Peter T Davis]

Did you sign any kind of contract with your investor? If you're running your company as a sole proprietor, then you probably could be personally sued. I'd recommend that you get a lawyer to draw up a contract, and discuss what form you should run your business, LLC/Corp or what. It probably would have been better to do this before accepting some investor's cash, but don't let that be a reason to delay.

[OhioDave]

Amy,
Your post does not describe what your business sells, but operating as a sole-proprietorship is very risky. You have little to no protection if you are sued. I would recommend getting a lawyer to draft up either LLC or Corp paperwork. These entities protect individuals from their business actions (to a point - there are some exceptions).

Like I said, I don't know what you sell, but here is a worst-case scenario: Say you sell baby clothes. Harmless, innocent, no problems... Uh no, (god forbid) a baby gets tangled in something from your baby clothes and the baby dies... As a sole proprietorship, you potencially are liable. The baby's parents can sue for damages and take your business, your house, anything you own (or maybe own in the future) as compensation. Uh Oh, you have an investor as well. His investment could be seen as an endorsement of an unsafe product. You investor is potentially liable and his house, car, livelyhood could be taken away by the courts (if not protected under a sheltered business entity). You've just unknownly put your investor at risk. *** I REALIZE THIS IS ALARMIST AND HIGHLY UNLIKELY *** But, it could all be avoided with a quick, relatively inexpensive visit to a business lawyer.

I am not a lawyer, nor do I play one of TV.

[Peter T Davis]

Good point, Dave, if someone suing your company finds out that your investor owns 20% of the company, then both of you get sued.

[TMA]

I am a little confused. By giving my investor 20%, he owns 20% of the sole proprietorship? How can I set up my business so neither I nor my investor is liable? I just retail, I don't manufacture anything. We have things set up so my investor has no say in the business, he just gets quarterly checks. I'd like to keep things as simple as possible. How does incorporating impact how taxes and recordkeeping are done?

[Peter T Davis]

Do you have a written contract with your investor? Yes, incorporating will have an impact on your taxes and recordkeeping, but generally it's a very positive impact. If your business is worth having an investor put $15,000 into it, it's worth a few hundred to consult with a good lawyer about setting up a proper structure.