When starting or growing a business, owners must understand the legal risks they are taking on. To make a smart investment in a business, you should explore ways to minimize potential legal liability, limit losses and protect your personal assets.
A San Jose corporate startup lawyer at the Law Offices of Mike Ross can assist you in exploring legal options to protect your financial and legal interests. Forming a corporation can protect business owners from liability, and an attorney can help you to decide if a corporation is the right choice for your business enterprise. Your lawyer can also assist with the process of incorporating your business and complying with ongoing California obligations for maintaining a corporate enterprise.
How Forming a Corporation Can Protect Business Owners from Liability
Many types of business organizations provide limited or no protection from personal liability. If you form a partnership or operate your company as a sole proprietorship, you are the business in the eyes of the law. If the business goes into debt, you personally go into debt. This is true even if you are a part of a partnership and are unaware that one of your co-owners is borrowing. Likewise, if the business is sued and a judgment is entered against it, you could have to pay the judgment out of your personal assets even if you were unaware that the co-owners were undertaking the actions that led to the litigation.
There are tremendous financial risks to investing in a company and assuming unlimited liability for the actions of the business. Fortunately, you do not have to take on these risks. Forming a corporation can protect business owners from liability and limit their losses to the amount that was invested in buying a share of the business.
When a corporation is formed, an entirely separate legal identity is created for the business organization. The corporation exists independently of its owners and can live on even after every initial owner is dead. The corporation files its own tax returns and the Supreme Court has even ruled that corporations have many of the same free speech and other rights as people do.
Since the corporation is a separate legal “person,” the actions that the corporation takes does not personally implicate the owners in most situations. For example, if you buy shares of Pepsi or Coke or another major company, you co-own a portion of that company. You do not, however, become responsible for paying if Pepsi is sued or if Coke goes into debt. Your potential losses are limited to the money you have invested to buy the ownership shares.
Not every corporation is a big corporation, and there are corporations owned by just one person, by just one family or by a small group of owners. Even these closely held corporations protect owners from liability provided that corporate formalities are maintained. This means that as long as the business is treated as a separate legal entity by owners, forming a corporation can protect business owners from liability.
You want to avoid things like mixing your personal funds with corporate funds or making personal guarantees for corporate debt in order to maintain the liability protections that forming a corporation can provide. The San Jose corporate lawyers at the Law Offices of Mike Ross can assist with forming a corporation and with understanding how to take advantage of the available liability protections. Call today to learn more.