Sole proprietorship offers no protection if you're ever involved in a lawsuit, an IRS audit, or even a divorce. But, a corporation, LLC, or limited partnership may not either. Read the results of a 10-year study that examined over 4,700 cases on how your business may not be protecting you at all.
Entrepreneurs, business owners, financial advisors, and attorneys all know that operating a business as a sole proprietor provides the least amount of protection in case of a lawsuit. That's a given. But, did you know that incorporating, forming an LLC, or even establishing a partnership may not protect you either?
It's true.
Recently I read an outstanding report on The Myth of Corporate Veil Protection, written by attorney Stanford A. Graham. After spending more than ten years researching more than 4,700 court cases, Mr. Graham concludes that your business entity may be providing you with far less personal liability protection than you think it might.
It doesn't matter whether you're operating as a corporation, limited liability company, or limited partnership what makes a difference is not the form of business you are using, but it's all about your actions since you incorporated.
The corporate veil is the term used to describe the shield of liability a corporation, LLC, or limited partnership is supposed to provide the owners of the business. And, if you've read the papers or listened to the news very much you've probably heard about "piercing the corporate veil." This refers to a court disregarding the existence of the business entity and holding the business owners personally liable.
The corporate veil is pierced by the court because the business owners didn't maintain all of the rules, requirements, and laws associated with their particular type of business. When the court makes this decision the business owner becomes personally liable and may lose more than just their business assets.
According to Graham's Article, piercing the corporate veil is the most litigated issue in corporate law today. In fact, he claims, there are very sophisticated, well-known and well-documented, legal strategies in place today that will successfully pierce the corporate veil 96% of the time when specific facts are proven.
Most business owners don't even think about the devastating affects this can have on them until it's too late. In fact, they usually don't even think about whether or not their corporate veil will even stand up in court until they are standing in court, themselves. Or, in other words, when it's too late!
Most people incorporate their business to limit their personal liability. Often they'll buy into the marketing hype that establishing a Nevada or Delaware corporation, an offshore corporation or a trust is all they need to achieve personal asset protection.
Even attorneys will suggest that liability protection is gained just by the act of incorporating a business and then operating under that business name. Unfortunately, this simply is not true.
Citing multiple examples from his vast storehouse of research, Mr. Graham establishes the case for concern. Given the volumes and volumes of rules, regulations, and laws on the books today, business owners can't possibly know all there is to know about maintaining their corporate veil.
The article offers a beginner's list of rules that a business owner must follow; as well as an excellent guide for missteps to be avoided. While neither list is exhaustive - such a list would be far too cumbersome and impractical to publish in a short article - they both provide a great beginning point for any business owner.
Furthermore, Mr. Graham offers six key points for every business owner to follow as well as a free risk assessment.
If you're a business owner his article, The Myth of Corporate Veil Protection, is a must read. Fortunately, you can get a free copy of it by clicking here .
