By Michael G. Kelly, Esq.

I often get asked the question “Should I incorporate to protect myself from personal liability.”  The general answer to that is “yes” but the answer is actually more complex than that.

Corporations, and the more recently created Limited Liability Company (LLC), are business entities that shield their owners from personal liability by limiting liability to the amount of their investment. To many this seems to be exactly what they are looking for.  Often these entities are used to shield owners from liability connected to a particular asset, such as a piece of real estate or an airplane. What often gets neglected is that they have to behave like a real corporation or LLC.

Each type of business entity has rules that need to be followed in order to provide assurance that a court would uphold that limitation on liability to others, otherwise the corporation or LLC will be treated as nothing but an alter ego of the owner(s) and personal liability beyond the amount invested may be imposed. 

For example, these entities should have a checking account in the name of the entity rather than the owner simply writing checks out of a personal bank account.  Another example is the case where personal liability is imposed on the owner of property where that owner of the property also owns and controls a company that is leasing the property (from the owner) and one of its employees or customers is injured while on the premises. Had the property owner transferred the property to the LLC instead of retaining ownership, he would have been in a much better position to avoid any personal liability.

It is also important to adopt corporate bylaws or an LLC membership agreement. Where these agreements call for meetings and votes or consents to actions, such provisions need to be adhered to at all times. Failure to do so will bring the alter ego problem back into focus when a liability occurs.

Lastly, it is important to adequately insure a business to further protect it against any liability that may arise.  It is best to seek the advice of any attorney regarding which type of entity to form for your business and the proper steps to be taken to preserve limited liability.

© Michael G. Kelly