Nope! Not by a long shot! Protection from liability via incorporation is one of the great myths of law that far too many people believe. Particularly in the case of small businesses, incorporation (or organization of a limited liability company) can provide very little protection from liability.
Seasoned Plaintiff’s attorneys, like those of us at Chappell Smith & Arden, P.A., are keenly aware of the slings and arrows of corporate immunity and whether a defendant enjoys such immunity is one of their first avenues of discovery in every pending case. If you are bringing a lawsuit against a business entity, you need to ensure that your attorneys are well-versed in corporate law—otherwise you may be missing a major weak spot in your opponent’s case. If you are attempting to protect yourself from a lawsuit, you need to be aware that incorporating your business still leaves massive opportunities for you to be sued personally.
So, after incorporating, what can someone be sued for? There are two major categories.
1. Debts and Liabilities Personally Incurred on the Job
Even if someone has incorporated his business, if he is personally involved in that business he is incurring potential personal liabilities each and every day. Let’s take the hypothetical of the owner of a towing company. His name is John Doe. Mr. Doe owns one tow truck and is the only employee in his business, but wants to protect himself from personal liability. So he forms a limited liability company, John Doe Trucking, LLC.
Three years after forming his LLC, John Doe inadvertently runs a red light while towing a vehicle and crashes into another car. There is no dispute that this wreck occurred while John Doe was on the job. So is he protected from personal liability?
Not even close. Anytime you are personally performing a task, you personally assume a duty of due care. Here, John Doe breaches his duty to use due care in operating his tow truck. So he can be personally sued despite having formed a limited liability company.
This is a fact that many—if not most—single owner corporations and companies do not realize. If you are your own boss and your only employee, the incorporation of your business provides you very limited protection from personal liability.
2. Any Company Debts and Liabilities in a Poorly-Managed Business
Another fact that many businessmen and women over look are their duties to maintain corporate or company formalities after they’ve formed their business. Corporations and companies are what the law refers to as “legal fictions.” In other words, they aren’t real people, but they are treated as persons completely distinct from their owners. But here’s the trick: in order for an owner to maintain the protection he receives from his company’s incorporated status, he must himself treat his company as a completely distinct person from himself.
There are several relatively easy ways to maintain this corporate distinction but, again, many business owners are completely unaware. First, owners should be maintaining a set of financial records and accounts that are completely separate from their individual records and accounts. Company funds should be used to pay for company expenses rather than “siphoned off” by the owner. The company should maintain its solvency and adequate levels of capital to continue its business.
If a business owner is using his business as a mere façade or alter ego of himself in order to provide protection from personal liability of the business, then a plaintiff can “pierce the corporate veil” to reach the assets of the owner.
So, in view of these two rather notable exceptions to the protections provided by incorporating a business, what do business owners actually gain from incorporating a corporation or organizing a limited liability company?
There are two major categories of benefits.
1. Debts and Liabilities of the Company Itself
If a business owner is smart, he will be careful to execute as many agreements as possible between third parties and his company, only. Contractual agreements between a company and a third party are only binding against the company (so long as the business owner has been appropriately managing his business). This is a major benefit of corporate immunity.
2. Liabilities of the Company’s Employees
If an owner has incorporated his business, he is also personally immune from the negligent acts of his employees. Taking our earlier example, if John Doe hired a second employee who was driving the tow truck that caused the wreck, the only two potentially liable parties would be the new employee and the corporation. John Doe’s personal assets would be safe.
So what is the meaning of this discussion to you? Though subjects such as corporate law and personal injury law may seem miles apart, they are actually intimately connected. Regardless of what side of a lawsuit you find yourself on, you need to make sure your attorneys understand the ins and outs of corporate immunity.
Chappell Smith & Arden, P.A. is a full-service litigation team with attorneys licensed to practice law throughout South Carolina, North Carolina, and Georgia. If you have a case involving corporate liability, we would be glad to review the legal issues with you, free of charge.