Posted on: July 2nd, 2016
A primary reason for incorporating a business is to limit the owner’s personal liability (i.e., protect personal assets). The key word is limit. Many business owners have the misconception that no matter what they do while incorporated, their personal assets are protected making themselves bulletproof. This is not the case. Below are a few examples of when incorporating won’t protect personal assets:
Business Owner’s Own Negligence. When an owner is negligent, their personal assets could still be at risk even if they are incorporated. For example, let’s say you are the owner of an incorporated trucking company and you are also a driver. If you cause personal injury to someone on the road, the injured party will have a claim against the trucking company (as the employer) and you (as the driver). In that case, your personal assets could be at risk because of your personal actions (as the driver).
Personally Guaranty A Corporate Debt. When a corporation incurs a debt or obligation, many times a bank or landlord will require the business owners to guaranty the debt/obligation of the corporation. This means that if the corporation defaults on the debt/obligation, the owner agrees to be personally liable for the debt.
Failing to Pay Employee Taxes Withheld. Owners can face personal liability and significant penalties for not paying the government the taxes that the corporation withheld from employee payroll checks. In fact, recently a business owner was sentenced to four years in prison and ordered to pay nearly $6 million to the governmentfor failing to pay employee withholding taxes.
Treating the Corporation As A Personal Piggy Bank. I have written about this extensively here but if you don’t treat the corporation like a separate legal entity, a court could “pierce the corporate veil” and hold the owners of the corporation personally liable for the debts of the corporation.
While incorporating has many benefits, owners need to be aware that there are still some risks involved and the corporate shield does not make them bulletproof.