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Myths and Mysteries: I Thought I Couldn't be Sued Personally if I Formed a Corporation

Guest post by: Marijo McCarthy

Article Overview: One of the results of last month's newsletter regarding the Massachusetts Homestead law (in addition to several clients finally filing for full homestead protection), was this common question: "Why should I worry about personal liability for business obligations… I formed a corporation?"

Myths and Mysteries: I Thought I Couldn't be Sued Personally if I Formed a Corporation

One of the results of last month's newsletter regarding the Massachusetts Homestead law (in addition to several clients finally filing for full homestead protection), was this common question:

"Why should I worry about personal liability for business obligations… I formed a corporation?"

To a limited extent, that's true; there are additional protections to the individual as a result of incorporation. Bear in mind, however, that these protections are a hurdle, not a wall and the possibilities for the business owner to be held personally liable are still numerous.

Here, for example, are three primary business obligations which can be turned into personal obligations before you know it:

1. Business taxes. These have the potential to follow you forever! It doesn't matter if you have a corporation, a limited liability company or something in between… do not treat the business' taxes as your own personal cash flow.
   
   Doing so can land you in trouble with both the IRS and state Department of Revenue, a situation whose outcome never favors the business owner. [P.S. The obligation does not go away in bankruptcy, either!]

1. Business loans. If you are a small business owner, you are probably used to giving your personal guarantee when your business borrows money. That's just part of the package.
   
   And depending upon the language of the personal guaranty you signed as part of the loan package, your lender might very well be able to pursue you personally… without even attempting to liquidate your business assets. You may be able to protect your home with a homestead declaration, but there is little to no protection for bank accounts, stock portfolios and other liquid assets.

1. Business leases. Brand new businesses are rarely, if ever, offered an office lease without the landlord demanding the owner's personal guarantee. The reason should be obvious: Your new business has no credit history, but you do. Your new business (probably) has no assets, but you do. Do the math!

There are, thankfully, an entire class of potential business creditors from whom you can protect yourself personally (and you should), by forming and filing an entity. But even here, the protections afforded under these circumstances demand that the business owner observe certain formalities in keeping business and personal activities and assets separate.

If you fail to do so, I assure you that the corporation may someday fail to protect you. It's called "piercing the corporate veil" and it is, just as it sounds, the way that creditors ultimately hold business owners personally responsible for their business obligations.

If you are now breathing a sigh of relief because you filed for homestead protection, think about those other assets you have worked so hard to accumulate over the years. Are they protected as well? [Unfortunately, there is no homestead protection for your bank accounts or stock portfolios.]

Forming the corporation is only step one. Make it count and operate your business in a manner that gives you maximum personal protection as your business grows.

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Article Tags: corporation, homestead protection, massachusetts, personal liability, sued personally



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