Does Forming a Corporation Protect Me from Debts and Lawsuits?
Time for the classic lawyer answer again! “It depends.” If you have a corporation, generally, the individual shareholders are not liable for the debts and liabilities for the corporation. For example, if your corporation was sued for $25,000.00, the other party could only collect from the assets of the corporation. The other party could not hold the individual shareholders liable (such as trying to seize bank accounts, retirement accounts, or place liens on real property).
This isn’t always the case. There is a concept in the law known as “piercing the corporate veil.” This means that a court will not permit the owners to hide behind the limited liability of the company and will hold the corporation’s shareholders personally liable for the acts and omissions of the company.
This can happen in several ways including:
(1) Not performing your corporation’s annual filings.
(2) Not maintaining internal formalities, such as recording your annual minutes and maintaining a registered agent in the state of formation and all other states in which you conduct business.
(3) Not maintaining a written record of corporate decisions.
(4) Not having the business adequately capitalized.
(5) Co-mingling corporate assets and personal assets.
(6) Distributing corporate profits in a negligent manner
(7) Not maintaining separate bank accounts for the company from personal matters.
(8) Paying for business expenses with personal assets and paying for personal expenses with business assets.
(9) Not filing tax returns or not filing separate corporate tax returns and personal tax returns.
This is not an exhaustive list, rather, it is just a few examples of how a corporation’s shareholders can find themselves being held personally liable for the debts and liabilities of the corporation. Therefore, many people find it beneficial to hire our office as their General Counsel.
For more information
If you have a legal question regarding your business or you are interested in retaining our office as your General Counsel, please contact our office at (513) 241-0400 to schedule an initial consultation. You can also fill out the contact form on our website.