Corporations and limited liability companies are the preferred structure used when operating a business. Why is that? These entities provide a structure that can protect the personal assets of the owners. Other business entities provide exposure to those personal assets.
When starting a business, liability is a major concern. The last thing any entrepreneur wishes to do is create significant amounts of personal liability as a result of a failed business venture. Although owners typically understand that there is risk in any business venture, they generally want to limit that risk to any of the amounts invested in that venture.
A business will generate many different creditors. Such creditors would include employees, vendors, landlords, and lenders. In addition, there is potential personal injury risk in the event that customers physically shop at a store or dine in a restaurant. Moreover, such liabilities could be generated by the employees working for such business owner.
Corporations and limited liability companies provide limited liability, which limits the claims of creditors of the business to only those assets of the business. An exception would be where a creditor specifically requires an owner to execute a personal guarantee. Aside from that, an owner of a failed business would not be personally responsible for the unmet liabilities of that business.
What is critical for business owners choosing to use a corporation is that they comply with its governance requirements and otherwise behave like a corporation. Corporations are owned by its shareholders. Shareholders conduct meetings every year to nominate the board of directors. In addition, the board of directors conduct annual meetings whereby they elect officers of the company. Those meetings must be memorialized in written minutes and kept with the corporate minute book. Corporations should also have separate bank accounts distinct from those bank accounts of the owners. Finally, corporations should not co-mingle the assets with those assets of their owners. If a corporation fails to abide by these fundamental requirements, there is a risk that a court will ignore the corporate structure and hold the owners personally liable.
All business owners must consult with attorneys to ensure that they choose the correct structure and that they are adhering to the corporate formalities required to preserve limited liability.
If you would like to discuss this topic, you may contact attorney Ted McGinn at (847) 705-7555 or email@example.com.