Protection of the Corporation

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In theory, the officers of a corporation enjoy some degree of protection from liability if the company is faced with a lawsuit. In practice, the degree of protection depends on several complex factors, and corporate officers are often named as defendants when their company is sued. I have known many small businesses that became corporations just to gain the level of protection that was afforded. Is it worth the cost of moving your business to a corporation and gaining protection? Each will have to decide their own fate. My position would be to forgo the Corporation unless you choose to be a corporation for other reasons. The protections that may be afforded the corporation have limits and may be invalidated for your corporation depending on the situation. The ‘corporate veil’ of small corporations has repeatedly been pierced and cast aside. My feeling is that an LLC may offer better protection rather than the Corporation. Another thought is that Insurances may be a better approach to establishing a level of protection.

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Here are some expressions from some legal groups.

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Piercing the veil is particularly easy when the defendant is a very small corporation, unless the owner of the company handles business matters very carefully. Some small-business owners incorporate, but then fail to operate the business like a corporation. If the owner doesn't follow the corporate bylaws, hold board meetings according to proper procedure or keep business and personal funds strictly separate, the court can rule that the corporation is really just an "alter ego" of the owner and not a separate legal entity at all.

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Typically, the corporate veil is pierced when the corporation is used to break the law, avoid a debt, commit fraud, or achieve some other wrongful result. In these circumstances, a court will treat the wrongful acts as if they were done by the individuals controlling the corporation, rather than the corporation itself.

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WARNING: The smaller and more closely held the business, the more intensely the court will scrutinize it. Small business owners are less likely to follow corporate formalities and therefore, it is more likely that a court would pierce the corporate veil when small businesses are involved versus large, more structured companies.