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Will Corp or LLC Really Protect?

I would like to hear your input, thoughts, etc. on the following statement. If you are a tort attorney, your professional input would be especially appreciated.

I have heard everybody and their cousin talk about incorporating or forming an LLC, LLP, etc. for "protection of their personal assets." This is all fine if your business has more than one principal. I understand the value of such an entity if shareholder / partner A goes out and commits a libelous act, the business entity will protect the personal assets of shareholder / partner B.

But I don't see the value of a single-employee / one person corporation, LLC, etc. Why? If the single owner goes out and commits the same libelous act, and the plaintiff sues, the plaintiff's lawyer will simply name the corporation / LLC AND the owner in the lawsuit. How many tort lawsuits only name one defendant? Very few, if any. For example, if the driver of a delivery truck causes an auto accident, the company, the company's president, the company's manager of maintenance, the driver, and anyone else that might have insurance is named as defendants in the lawsuit. For good measure, the truck manufacturer or malfunctioning auto part's manufacturer might be included too.

Simply put, if a single owner is named in a lawsuit, the owner as well as the business entity will be named as defendants. For the cost of incorporating and annual regulatory filings, wouldn't a single owner be better off buying a large liability insurance policy? In what type of scenario would a single owner benefit from, and really be personally protected, by a corporation or LLC entity?

Thanks in advance for your insight and thoughts, Russell Tuncap, CMA, CPA

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Reply to
R
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I think you are barking up the wrong tree slightly here. If the single stockholder commits an act for which he can be sued, that is one thing, but most corporations are designed to shield the owners from liability to vendors and other creditors. As long as the stockholder runs his corporation professionally, makes all creditors aware the he is incorporated, and never signs a personal guarantee, the stockholder will not be personally obligated for the debts of the corporation if it should fail for non-fraudulent reasons.

Reply to
___cliff rayman___

"R" wrote

Don't mistake forming a corporation, LLC, etc as a replacement for proper insurance.

None really. Things can be structured in such a manner to further protect any non-corporate assets, like placing title in the spouses name.

But, the real goal is to never see the inside of a courtroom as a defendent. In short, run your business in a proper fashion.

Reply to
Paul A Thomas

"___cliff rayman___" wrote in snipped-for-privacy@tornado.socal.rr.com...

true but almost no one will be your debtor without a personal guarantee

Reply to
John

One purpose of a one-person LLC or corporation is to limit the personal liability of the sole owner/shareholder. The liability protection doesn't extend to the personal acts of the sole corporate/LLC owner, just to the acts of the corporation/LLC and its other employees, etc.

An example would be a one-person LLC that owns a rental property, and the LLC hires a Property Management Company to manage the property and hire professionals to do repairs, etc. Then, if a tenant or visitor is injured on the premises, the one-person owner's exposure to liability is limited because he/she is only a shareholder and did not personally commit any tortious acts. The same would be true for contract claims against the LLC.

Another example would be a one-person LLC that operates a seminar/training business. The LLC hires a trainer as an independent contractor to conduct the seminars. If a seminar student files a claim for sexual harassment or discrimination during the teaching of the class, the one-person owner's exposure to liability would be limited because he/she didn't personally commit the alleged acts.

In both scenarios above, the plaintiff could allege negligent hiring, etc., but the ability of the plaintiff to actually succeed in an individual claim against the one-person owner would be diminished or eliminated.

And, yes, the LLC/corporation should have insurance coverage (including directors and officers liability coverage) as an additional protection.

Reply to
R-Jay

There are documented cases of officers/directors being held personally responsible for debts of a corporation in Canada. Effectively, if the officer or director had/should have/was responsible for certain aspects of the business, then they can effectively be held responsible.

More or less, there is no "corporate veil" when it comes to fiscal responsibility or fiduciary duty any more. Under certain circumstances, there is no protection by incorporation.

However, the OP should consult an attorney and an accountant, and a good tax planner as well to look at all pros and cons to incorporation.

Reply to
S.M.Serba

In my experience most small single owner corporations do not treat the business as a corp. They commingle funds, draw little or no salary, pay personal expenses directly from the corporate account, do not keep accurate corporate records, and often do not even take the time to actually "issue" stock certificates to themselves.. These alone are enough for any court to pierce the veil of the corporation, offering no legal protection.

On the other hand, if a corporation is strictly operated as a corp. and the action that caused the suit is not a direct act of fraud or negligence by the sole shareholder, he/she would probably be able to shield his personal assets (although the company is often thier largest asset). If the source of the suit is an employee or product liability the corp. should have insurance to protect against those liabilities.

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