Limited Liability

One of the biggest benefits of forming a corporate entity is to provide owners with limited exposure to liability issues. Some business structures are set up in a way that makes owners personally liable for the financial obligations and other liabilities of their business. In most cases, creditors can even target the personal assets of the owners to satisfy debts that have been accrued by the business. This is true in structures such as:

  • Partnerships
  • Sole proprietorships

When a corporation has been formed and it is properly operated, owners are protected from liabilities such as those mentioned above. For example, if you were to form a partnership with a few other people and one of your partners makes a number of expensive purchases in the company's name, you and all the other partners can be held personally liable for the full amount of those purchases. Creditors could target things such as your:

  • Personal bank accounts
  • Vehicles
  • Real estate

If only one of the partners involved has enough assets to cover the debt in question, he or she may be required to pay off a debt that he or she was otherwise not responsible for accruing. In the case of a corporation, however, the company can go completely bankrupt and, while shareholders can potentially lose the initial investments they made in the company, creditors will be unable to target their personal assets to satisfy any outstanding debts that were accrued.

Say, for example, you own a taxi company that has been set up as a sole proprietorship. If one of your drivers was to get into a serious accident, you would be held personally liable for any damages associated with it. If the driver was using illegal substances and somebody was to die as a result of the accident, associated damages could come out to much more than your insurance policy can cover. As a result, you could lose everything you own.

However, if this same scenario was to happen in a corporation, the company would be held liable for any damages and your personal assets would remain untouched.

Personal Asset Protection

Many business owners are concerned with protecting their personal assets. One of the best ways to do this is to incorporate your business. Corporations can:

  • Own property
  • Conduct business
  • Take on liabilities
  • Take legal action
  • Have legal action taken against them

A corporation is a completely separate legal entity from its owners and is responsible for its own financial obligations. This means the corporation's creditors can normally only pursue payment using the company's assets and cannot target personal assets belonging to:

  • Owners
  • Shareholders
  • Directors
  • Officers
  • Employees

In essence, this means owners can carry out their business practices without having to worry about risking their:

  • Personal homes
  • Vehicles
  • Financial assets

If you were to set up your business as a partnership or sole proprietorship, however, you would be held personally liable for your company's debts and your personal assets are under no protection from creditors. In fact, your personal liability in such matters is practically unlimited. Simply put, this means that if you were to go out of business or find yourself acting as the defendant in a court case, creditors and the court could target things such as:

  • Your house
  • Jewelry
  • Your vehicles
  • Financial accounts
  • Any other property you personally own

Incorporating your business helps prevent your personal property from being targeted in such cases. In other words, if you incorporate your business, the only thing for which you'll be personally responsible are the investments you make into the company. While the limited liability that corporations provide is not a guarantee that all your personal assets are safe, this protection is highly preferred over the complete lack of protection provided by partnerships and sole proprietorships. This fact alone makes incorporating an attractive option for many business owners.

In fact, while there are a number of other attractive features associated with incorporating a business, this is the one feature that gets the most attention and exposure.

If you need help with advantages of incorporating, you can post your legal need on UpCounsel's marketplace. UpCounsel accepts only the top 5 percent of lawyers to its site. Lawyers on UpCounsel come from law schools such as Harvard Law and Yale Law and average 14 years of legal experience, including work with or on behalf of companies such as Google, Menlo Ventures, and Airbnb.