Perhaps the biggest decision facing a new business owner is the manner in which he intends to conduct business. The most common forms of ownership are a sole proprietorship (sometimes referred to as a d/b/a), a partnership, a corporation or a limited liability company. There are a variety of competing factors the business owner must assess before deciding how to proceed.
Starting a business is a risky undertaking and there is a lot of concern about whether the owner will lose everything if the business fails. One of the most prominent features of a corporation or limited liability company is that they both shield personal assets from business liabilities.
For example, if a corporation’s employee caused personal injury to another person, the injured party could not bring a lawsuit directly against the business owner as an individual and could not satisfy any judgment recovered out of the owner’s personal assets. The injured party would have to sue the corporation and any recovery would be limited to corporate assets. Neither a sole proprietorship nor a partnership provide these protections.
This is not always foolproof. Sometimes a Court will permit a creditor of a corporation to pursue the personal assets of the owner. This is called piercing the corporate veil.
The basic idea is that if the business owner does not comply with all corporate formalities and intermingles his personal assets with the business assets, the owner is not acting as a corporation and is not entitled to the protection of an incorporated business.
There are a variety of things that a business owner can do. When conducting business, it is imperative to identify the business as a corporation and when the owner signs his name, he must identify himself by his corporate office.
When the corporation is formed, generally a corporate record book is created, minutes of meetings are recorded, shares of stock issued and actions taken by resolution which are reflected in the minutes of the meeting. A corporate bank account should be established and personal funds should not be intermingled with business funds.
There will be times that a creditor will require that you personally guarantee a debt. This is almost always true when executing a lease or borrowing money from a bank. In these cases, the owner who personally guarantees the debt will be personally liable regardless of the form of business. However, there are still many occasions when the corporation will be the only thing standing between the creditor and the business owner’s personal assets.
An owner of an incorporated business must always be certain to strictly adhere to all corporate formalities. If he doesn’t, then he has put his personal assets at risk and will have defeated one of the very reasons he incorporated his business in the first place.