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How does setting up a Corporation Help provide Liability Protection

By Jason Lee
Filed under: Corporations LLC         Words in this Post: 340



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This liability protection is extremely important to the small business owner. Suppose you sell an electric scooter to someone who gives it to his child for Christmas. On Christmas Day, the child is running it in the street in front of his home. A wheel falls off and the child crashes, injuring himself. It would be difficult for the parent to sue the Chinese company that made the scooter. He could, and probably would, sue the importer or distributor you purchased it from, but he could also sue you. Because it is virtually impossible for you to purchase product liability insurance you are now exposed to this liability. In this case, because you are incorporated, the lawyers would sue the corporation— not you personally. If they win, they could only attach the corporation’s assets, not your personal assets such as your home and retirement funds. For this reason, most small business owners keep a minimum of assets in their corporation and a minimum of funds in their corporate bank accounts.

This is a simplified explanation of how incorporating protects you against personal liability. There are rules you must follow in how you set up and run your corporation to prevent a potential plaintiff from reaching through the corporation to attach your personal assets. If you don’t maintain proper paperwork and files, if you commingle money from the corporation, or if you use the corporate debit card for personal expenses you are opening yourself up to personal liability. Lawyers and creditors always try to pierce this corporate veil when they file a lawsuit against a small-business corporation. However, as long as you follow the rules, you will more than likely be able to protect your personal assets.

Note: The discussions and examples provided here are simple illustrations for informational purposes only. Although I have years of experience owning and running small businesses, I am not an attorney, CPA, or licensed tax professional. I strongly urge you to contact an appropriate professional before making any decisions that could impact your legal or tax liability.

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Author: Jason Lee

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