Protect Yourself From Unnecessary Headaches & Potential Suit
Why open yourself to personal liability when you can be protected by conducting business under a corporation.
Corporations enjoy many advantages over business partnerships and sole proprietorship. But there are also disadvantages. Below you will find a cursory explaination of these advantages and disadvantages.
Stockholders are not liable for corporate debts. This is the most important advantage of a corporation. In a sole proprietorship and partnership, the owners are personally liable for the debts of the business. If the assets of the sole proprietorship or partnership cannot satisfy the debt, creditors can go after each owner’s personal assets. On the other hand, if a corporation runs out of funds, its owners are usually not responsible.
Under certain circumstances, however, an individual stockholder may be liable for corporate debts. This is sometimes known to as “piercing the corporate veil”. These include:
1. If a stockholder personally guarantees a debt.
2. If personal funds are intermingled with funds of the corporation.
3. If a corporation fails to have director and shareholder meetings.
4. If the corporation has minimal capitalization or minimal insurance.
5. If the corporation fails to pay state taxes or otherwise violates state tax law.
6. If a fraud is perpetrated.
Continuous life. The life of a corporation, unlike that of a business partnerships and sole proprietorship, does not expire upon the death of its stockholders directors or officers.
Easier to raise money. A corporation has many avenues to raise capital. It can sell shares of stock, and it can create new types of stock, with different voting or profit characteristics. Plus, investors will rest assured that they will not be personally liable for corporate debts.
Ease of transfer. Ownership interests in a corporation may be sold to third parties without disturbing the continued operation of the business. The business of a sole proprietorship or partnership, on the other hand, cannot be sold whole; instead, each of its assets, licenses and permits must be individually transferred, and new bank accounts and tax identification numbers are required.
Higher cost. In certain situations, corporations cost more to set up and run than a sole proprietorship or partnership. For example, there are the initial formation fees, filing fees and annual state fees. These costs are partially offset by lower insurance costs.
Formal organization and corporate formalities. A corporation can only be created by filing legal documents with the state. In addition, a corporation must adhere to technical formalities. These include holding director and shareholder meetings, recording minutes, having the board of directors approve major business transactions and corporate record-keeping. If these formalities are not kept, the stockholders risk losing their personal liability protection. While keeping corporate formalities is not difficult, it can be time-consuming. On the other hand, a sole proprietorship or partnership can commence and operate without any formal organizing or operating procedures – not even a handwritten agreement.
Disclaimer: The author of this posting is licensed to practice law in the State of New York. This posting is intended as general information only, and is not provided as legal advice in connection with any specific case, and does not create an attorney-client relationship.