Top Reasons to Form a Corporation
Corporations are the longest standing business structure leading the pack in the amount of protection and flexibility for shareholders. We examine the top reasons to form a corporation for your business. These benefits are provided by the corporate veil, which is the legal definition of the separation between the business and its owners.
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- Limited Liability for Shareholders
Corporations offer the strongest protection from business liability for the business owners or shareholders. This means that there are provisions in the law such that your personal assets are not in jeopardy to satisfy corporate obligations, specifically from creditors. Legally, corporations are separate entities from those who own them. Corporations will pay their own taxes, can own property, enter contracts, sue and be sued independently of those who own them and are responsible for their own debts and actions. As long as your corporation is operated as a truly separate entity, shareholders are not personally liable for business obligations. There are exceptions to this and shareholders can assume personal liability if the corporation is improperly established if any individual personally guarantees debt or credit or funds are commingled where the shareholder and business are acting as one in the same. In order to truly benefit from the liability protection offered by corporations, they must be organized, managed and maintained as true separate entities.
Corporations have hundreds of years of court-proven performance protecting shareholders from business liability. If the corporation was used as a tool to defraud any creditor or was under-capitalized as an attempt to defraud a lender, the corporate veil could be pierced by the court. Therefore, the corporate structure could be disregarded, and the business owners face could be held personally liable for the actions, debts, and obligations of the business. It is important that your company is properly established and that you follow formalities and maintain separate status when operating a corporation.