I wish to start my own business, I have talked to some friends who say that I should form a corporation to protect myself. Will a corporation protect my assets?
If you set up a proper corporation, and follow corporate procedures once the corporation is established, you may be able to protect your personal assets if the corporation should fail. A corporation is a separate “entity” just like another person running your business. This entity will file its own tax returns, will have its own tax identification numbers and will establish its own accounts with suppliers and banks.
If you establish a corporation with a specific set of assets, maintain the corporation as separate from your own personal assets, and personal debts, the corporation may be able to protect you individually and personally if the business should fail. This is because if the business fails, the only thing that anyone can attach will be the assets of the corporation, which do not include your home, or your personal assets. But read on.
Now the fallacy of having a small corporation. If you borrow money from the bank, plan on the bank requiring you to personally guarantee the loan along with the corporation. Also many of your suppliers will also require personal guarantees. Why, you may ask. Because the Banks and suppliers don’t want to be holding the bag when the business goes under, while you still have all of your own personal assets.
Additionally the taxing authorities (meaning the government) do not have to respect the corporation if the corporation owes taxes. The government will approach the person who signed the returns, regardless of whether a corporation is in existence or not, and that person will be solely responsibility for any tax liability.
Forming a corporation may be in your best interest for other reasons though. Corporations are fairly easy to transfer from one person to another, therefore for estate planning purposes, it may be the correct business entity for you. A corporation can also establish health plans, retirement accounts and bonuses. all of which may benefit you.
One of the best protections that a corporation will provide is from personal liability if someone working for the company does something wrong. Break something belonging to another person. Paint the wrong house, forget to put the cap back on the oil pan, mistakes that may cause the corporation and owners money for damages. To a third party, if the corporation is run correctly, they may only go after the assets of the corporation, not the individual assets owned by the shareholders of the corporation.
There are several different business forms that you may choose when you decide to set up your own business. Before you determine which will benefit you the most you will need to speak with your financial advisor and your attorney. There are different risks and responsibilities with each form.
As always this is a general answer, to a general question. You should always consult your attorney about the specific issues that surround your specific needs.
If you have a question for Attorney Kukuvka, please forward it to: Cynthia M. Kukuvka, Attorney at Law, 330 E. Main St, Palmyra, NY 14522 or e-mail to cklaw@verizon.net