The corporate shield and its limits

By May 23, 2016 business

Owning and operating a business is full of risks, and one important job of a business owner is to limit those risks. Some small businesses are sole proprietorships or are individuals operating under an assumed name. Doing so may provide your business some branding benefits, but it does not protect you. Under these circumstances, the company’s debts and liabilities are your debts and liabilities. If a creditor brings a lawsuit against your business, the lawsuit is against you personally and all your personal assets are potentially in jeopardy.

It is very simple to limit this risk.

One of the most significant benefits of forming your own corporation or limited liability company is that it is a distinct legal entity. There are significant distinctions between corporations and limited liability companies, but they provide the same “corporate shield.” This means you are not necessarily personally liable for your company’s debts.  If, for example, your company takes out a loan and defaults on it, you will not be personally liable on that loan unless you personally guaranteed it.  This protection can also be used to protect one of your company’s assets from your other company’s liabilities.  For example, landlords will often have one company own the building and another company act as the landlord.  If a tenant sues the landlord and wins, that tenant cannot try to satisfy a judgment against the building itself.

This shield has limits. One common misconception is that the corporate shield insulates you from the consequences of your own conduct. Your company may very well be liable for your conduct, but that does not mean you no longer have liability. For example, let’s say you run your company’s marketing campaigns. You decide to use your competitor’s trademark in your advertising. Your company is liable for infringing your competitor’s trademark. But you are also personally liable because you personally engaged in the infringing conduct.

So, while forming a legal entity such as an LLC or corporation does not protect you individually in every situation, the corporate shield it creates is worthwhile. It is an easy and cost effective way to reduce the risk inherent in running a business. Just understand its limits, because you will need to protect against other risks using different tools.