Common Question: Will Incorporating Protect My Assets and What are Some of the Risks?

A common question we get from small business owners, startups, and individuals looking for another layer of protection is “If I incorporate my business, would my assets be protected and what are some of the risks associated?”

Many small business owners incorporate because they believe that incorporating will protect their personal assets if they get sued. Although the understanding, in theory, is correct; unfortunately, in reality it is hard to shield your assets if you do not follow corporate protocols. Many business owners invest most of their time and energy on the development of their businesses and tend to forget about following their corporate protocols to maintain the protection they intended when they incorporated their businesses in the first place. 

The primary benefits of operating under a corporate form generally revolve around tax and marketing considerations and ease of attracting investors.  In real life, while the benefits of incorporation may technically be available to a business of any size, in practice very small businesses may gain little or no benefit by incorporating until they have employees or can reap tax benefits by incorporating.  The disadvantages of incorporating are the additional expenses small business owners may incur.  

Protecting your assets is an ongoing process in your daily business operation. In many circumstances business owners find themselves asked to personally guarantee a loan, payment, or a note.  Regularly, banks do not approve a loan if personal guarantee is not signed.  Business owners should be more attentive and cognizant of the way they operate and conduct their businesses.  Often exposure to liability is minimized and at times liability cannot be averted.  Even though you, as a shareholder of your own corporation, or member of your LLC, may not be responsible for the debts of the corporation (since the corporation is a separate "person/entity"), there is nothing to prevent someone from suing you personally for actions you performed.  For instance, officers and directors may be held personally liable for corporate checks issued against insufficient funds. 

To minimize your liability and maintain the protection of your assets, business owners should be vigilant of any and all actions in the following situations:

1-  If shareholder(s) or member(s) disregard the corporate rules and protocols.

2- If shareholder(s) or member(s) disregards the corporate entity.

3- If shareholder(s) of member(s) use the corporation to evade a statutory, contractual or tort responsibility.

4- If shareholder(s) of member(s) commingle corporate and personal funds.

4. The corporation is used to hinder, delay, or defraud creditors.

5. A fraud would result if the corporate structure were allowed to shield shareholders from liability.

6. Shareholders have used it as a sham, or…to defeat a public convenience, to justify wrong, protect fraud, or defend crime.

Overall, the best practice to maintain the protection of our assets is to stay vigilant of what you do and how to run your business on daily basis. Organization, clear separation of books/records, and ensuring that you (or your accountant, CPA, CFO, or other financial advisor keeps all books/records up-to-date and prepared for an audit at any time is a good start.