That’s the theory of incorporation: create a separate legal entity in the form of the corporation.
Let that entity incur debt and expose itself to other risks. If it fails, the personal holdings of the owners of the corporation are safe.
But, in the real world, most big ticket debts that a corporation might incur require the guarantee of the owner.
So if both corporation and owner are liable for the business debts, what has incorporation gained you?
You’ll be surprised.
Incorporate to protect the business
Consider the same move, incorporation, for the opposite reason.
Incorporate to protect the business from the owner’s debts.
A sole proprietor and his business are one and the same in the law.
When the proprietor has a tax problem or there’s a judgment outstanding against him, all of the business cash and assets are exposed to that debt.
The business bank account can be levied for the owner’s back child support or a judgment against the owner for unpaid magazine subscriptions. [Read more…]