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The Number One RISK of Incorporating Your Business

February 10, 2012 | Comments: 0 | Views: 122

Incorporating your business can be a great idea. An incorporated business may appear more established than a sole proprietorship, and it can be easier to attract funding to a corporation. Additionally, a corporation can last forever (`in perpetuity`) and corporate stocks (ownership documents) can be bequeathed in your estate. A partnership or sole proprietorship, in contract, will die with any owner, unless special steps are taken.

The biggest reason, though, that people choose to incorporate is to protect themselves personally from liability for their business activities. Unfortunately, that's not always a perfect fix.

If you are doing business in your own name, or in another name but without the benefit of a corporate structure, the important thing to remember is that you are the business. That means if the business owes money, goes bankrupt, or is the subject of a lawsuit, the owner is responsible for financial obligations.

A corporation, on the other hand, is a "person" under common law, which means it can sue and be sued on its own, and if the corporation is bankrupt or subject of a lawsuit, the corporation itself, NOT the owner(s), is responsible to pay the bills.

So what's the downside? First, corporations typically require fees, ongoing documentation, and even have to file their own tax return. If the owner fails to meet these requirements, the corporation may fail to provide liability protection.

It's called "piercing the veil". A business owner who fails to meet documentation requirements may find their corporation is not strong enough to protect them from personal liability. In the event of a legal action, the court that "pierces the veil" essentially determines that the shield of corporate structure has been neglected to the point where it is no longer a valid protection.

Key points:

Incorporation: the Advantages

Makes the business appear more establishedMay improve funding opportunitiesLasts in perpetuityOwners (called stockholders or shareholders) are not liable for business losses

Incorporation: the Disadvantages

Higher administrative expenses Extensive ongoing documentation requirements Piercing the Veil: if your corporation does not follow basic corporate documentation requirements, and is subject to a lawsuit or bankruptcy proceeding, the court may elect to `pierce the veil`of the corporation and go after the owner(s) for reimbursement for business obligations.

The upshot? Do your due diligence. If you incorporate your business, talk to a lawyer, or carefully review the requirements and be sure you remain up to date. It's the best way to keep that `veil`strong and healthy!

Christine H. Williams PFP, JD

Christine earned her law degree in Chicago and practiced there in the 1990's. She now lives in British Columbia, Canada where she earned her Personal Financial Planner designation and where she teaches law at university level and online. Christine provides free law video lessons about noncooperation, contracts, and related business issues at

Source: EzineArticles
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