In honor of Halloween, we've decided to share a true business startup horror story.
Horror Story - Travis Loses His Ford F-150 And Fishing Boat
Travis owns ABC Custom Jewelry (a fictional name), a sole proprietorship business based in Sioux Falls. In 2018, Travis was attending the SDSU-USD basketball game in Brookings with his family. During halftime, he received a call from an employee who was frantic. She had just been served with a lawsuit against ABC and Travis!
Travis stepped outside and immediately called ABC's lawyer. Both Travis and the lawyer thought the lawsuit was frivolous. ABC had recently created a set of custom watches for a manufacturing company in Minnesota. ABC used the logo and tagline the manufacturing company had provided, put it on the watches, and that was that - or so ABC thought.
It turns out that ABC (unknowingly) used a trademarked tagline on the watches. A manufacturing company out of Florida sued ABC and the Minnesota manufacturing company. Unfortunately, the manufacturing company refused to indemnify ABC. After a terrible few months with the fear of going out of business and lots of legal fees, ABC and Travis eventually paid a large sum to settle the case. However, Travis had to sell his beloved Ford F-150 and fishing boat to pay some of the settlement!
If only Travis had formed a Limited Liability Company (LLC), he could have established a new business entity that was legally separate from Travis' personal assets. This separation provides what's called "limited liability protection." If Travis would have done this, he wouldn't have had to sell his Ford F-150 and his fishing boat!