Deciding Whether to Incorporate? Treat Your Corporation like, Well, a Business
Suppose the unthinkable happens and you get sued. Is it possible for the lawsuit to tap personal as well as corporate assets?
While this can happen (attorneys call it "piercing the corporate veil"), it's rare. "Courts don't want to pierce the veil," emphasizes Reid. "However, they may have little choice if owners misuse the corporate format — deliberately performing an activity hazardous to the public, running the corporation as a shell, taking all the profits as personal income and leaving no assets in the corporation."
As a general rule, if you maintain scrupulous records and can document that you manage your personal and corporate affairs responsibly, your personal assets will be safe.
It's vital to separate your corporation from your personal life and maintain records that document the distinction. For instance:
- Open a bank account for your corporation, and keep its funds separate from your personal bank account
- Install a separate phone line for business use only
- Create corporate stationery, and use it only for business correspondence
- Maintain separate bank statements and accounting records for business and personal transactions
- Use corporate funds to make corporate purchases, personal funds to buy personal stuff
One caveat: If you borrow money, you may be asked to put up personal property as collateral or sign a personal guarantee to repay the loan. When you do this, these assets are no longer protected by the corporate veil. If you cannot repay the loan, your creditor can legally claim them. However (unless you've been doing things you shouldn't), the assets that remain in the corporation will still be protected.