Many websites advertise services to quickly and inexpensively incorporate your personal business as a way to protect your assets, warning that without incorporation, you could lose “everything you own, your house, car, retirement accounts,” etc. These services enthusiastically tout your ability to incorporate your business without the expense of obtaining legal advice. But will simply incorporating your business protect you from those risks? The answer is both “yes” and “no.” But one thing is clear: there are several types of liabilities where incorporation will definitely not protect your personal assets.
First, be aware that that the decision to incorporate, form a limited liability company, or create some other type of legal entity for your business involves much more than just attempting to shield you from personal liability. There may be taxation, regulatory, and other legal issues that dictate the best form of organization for your business. The companies that advertise quickie incorporation services do a poor job of counseling you on the right form for your business, if they make any attempt to do so at all. Many don’t. Others provide a drop-down menu checklist of factors. Others, a list of “frequently asked questions.” Only an attorney who knows the specifics of your situation as a result of personal consultation with you can properly advise you on the form of organization that best suits the needs of your business. The relatively modest fee an attorney will charge you for that advice is money very well spent in the long run.
Even if you are convinced that a corporation or limited liability company is the best organizational form for your business, there are many types of personal liabilities you will not be able to escape. There are three basic types of potential liabilities every business faces and each of them can, in the right circumstances, pose a threat to your personal assets even if your business is incorporated.
All businesses enter into contracts, formal or otherwise. If your business buys supplies, takes out a loan, rents office space, or sells a product or service, it has potential contractual liabilities. Technically, as long as the contract is in the name of the business, you (the owner of the business) are not personally liable if the contract is breached. However, many times the other party to such contracts will, when dealing with a personal business, require the owner to personally guarantee the obligation created by the contract. Thus, if you rent an office in the name of your incorporated business, your landlord may well require you to sign a personal guaranty for the rent. Likewise, any bank loaning money to a “personal business” is only going to do so based on the credit-worthiness of the individual owner, incorporated or not. And that individual owner is almost certainly going to be required to personally guarantee the debt. Individual suppliers may also require personal guarantees before selling equipment or durable goods to such a business. The bottom line is that an “individual” business, even if incorporated, can generate contractual liability that will potentially threaten your personal assets.
Businesses can also incur liabilities such as fines or penalties for failure to comply with a wide variety of regulations. In many instances, these types of regulatory violations give rise to “responsible person” liability, i.e., individual liability on the part of the person responsible for ensuring compliance with regulations. For example, if your small business fails to pay payroll or other types of taxes, both the incorporated business and the owner may liable for the deficiency. Incorporating your business will not shield your personal assets from this type of liability.
Finally, business activity may generate tort liability, such as personal injury lawsuits. For example, if you are delivering a product to a customer and cause an automobile accident resulting in injury to another, since you were acting for the business at the time, the business is liable for the consequences of your negligence. However, even if the business is incorporated, that will not allow you to escape personal liability for injuries which you caused through your negligence. Tort liability generated by your business is your individual responsibility to the extent you participated in the conduct which gave rise to the liability. You cannot shield your personal assets from such liability simply by incorporating your business.
In summary, organizing your personal business as a corporation or limited liability company is as easy and inexpensive as the quickie incorporation companies and websites suggest … in the short run. However, the claim that by doing so you can bulletproof your personal assets is, at best, an exaggeration and, at worst dangerously misleading. Moreover, incorporation is not a “one size fits all” solution for businesses. Only an attorney experienced in the formation of business organizations, familiar with your personal situation through face to face consultation and dialogue, can properly advise you as to the best form of organization for your business, and explain to you the benefits and disadvantages of each form of organization, and how they impact your business. You might “save” a modest amount of money by incorporating your business using Legalzoom©, The Company Corporation©, Incfile.com, or similar services, rather than going to an experienced attorney for advice first. But you may well find out the hard way that such “savings” are only an illusion.