Corporations and Limited liability companies
Types of Businesses and Business Formalities
Below is some basic information about various types of companies. This information is not complete, but it should give you a little bit of a better understanding about companies and the benefits of forming a corporation or limited liability company. Here are a few of the most common ways to organize a business:
- Sole Proprietorship – no liability protection
- Partnership– no liability protection
- Limited Partnership– liability protection for some, but not all owners
- Limited Liability Company (LLC) – liability protection for owners
- Corporation (for-profit) – liability protection for owners
The key to protection from liability for the shareholders, directors, and officers of a closely held corporation, and for members and managers of an LLC, is in carefully maintaining the separateness of the business entity through strict observance of business legal formalities.
Forming and operating an LLC or a Corporation is a bit more complicated and costly than operating a sole proprietorship or partnership, but well worth the trouble for most small businesses. The main benefit of an LLC or a Corporation is that these structures limit the personal liability of owners for business debts, liabilities and judgments against the business.
Corporations and LLCs are distinct from other types of companies in that they are independent legal and tax entities, separate from the people who own, control and manage them. Corporations and LLCs are highly desirable for people who either: (1) run a risk of being sued; or (2) have substantial assets that they would like to shield from business creditors.
In certain situations, however, the courts will set aside the protection from liability that Corporations and LLCs generally afford its owners, and hold the owners legally responsible for company debts. This is referred to as “piercing the corporate veil.” This piercing of the corporate veil will occur when a court determines that corporate or LLC formalities have not been observed and the company is nothing more than the tool or alter ego of the owners.
According to this legal concept, owners who blur the distinction between the company and themselves should not be allowed to hide from liability behind the company veil. The distinction between company and individual may be blurred where, for example, a company bank account is co-mingled with the personal account of an owner, or when an owner is paying personal debts with company assets.
Piercing the corporate veil should not be confused with direct personal liability. If a business owner takes some action (or fails to take some action that he is legally obligated to take), the responsibility for any resulting damage or injury is the individual's and possibly the companies, whether or not the company is incorporated or organized as an LLC. Also, incorporating or forming an LLC will not help a professional avoid liability for his or her malpractice.
Business owners will also be responsible for company liabilities if they agree to guarantee a company debt, or if the company debt appears to be the debt of the individual.
Please contact our office for a consultation if you wish to discuss this further, including specific factors and legal formalities that the Court considers when piercing the corporate veil.