Corporations and Limited liability companies
Types of Businesses and Business Formalities
Below is some basic information about different 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.
Below is a list 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 of shareholders, directors and officers of a closely held corporation is in carefully maintaining the corporate separateness through observance of the corporate formalities.
Corporations and Limited Liability Companies
Forming and operating an LLC or a Corporation is a bit more complicated and costly, but well worth the trouble for most small businesses. The main benefit of an LLC or a Corporation is that these structures limit the owners' personal liability for business debts and court judgments against the business.
What sets the corporation apart from all other types of businesses is that a corporation is an independent legal and tax entity, separate from the people who own, control and manage it. Corporations and LLCs are highly desirable for business owners who either, 1) run a risk of being sued, or 2) have substantial personal assets they want to protect from business creditors.
Business owners who have incorporated their businesses must be aware that corporate shareholders or LLC Members may be held legally responsible for the liabilities and debts of the company in some situations. The law allows creditors or claimants to "pierce the corporate veil" under certain circumstances and hold the owners personally responsible for the liabilities and debts of a company, if it determines that corporate or LLC formalities have not been observed, and that the company is nothing more than the tool or alter ego of the individual. The theory behind this legal concept is that owners who blur the distinction between the company and themselves should not be allowed to hide behind the corporate veil.
Piercing the corporate veil should not be confused, however, 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 resulting damage or injury is the individual's, whether or not the business is incorporated or organized as an LLC. Incorporating or forming an LLC will also not help a professional avoid liability for his or her malpractice.
Business owners will also be responsible for company liabilities if they agree to guaranty 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 the specific factors that the Court considers when holding a business owner liable.