Many small business owners take the correct first step – after coming up with their business idea, they form a corporation, limited liability company, or other business entity existing within the laws of their state, which they are then able to operate under. But many business owners stop at this first step and do not understand the concept of their corporation or company existing as a separate legal entity or “person” that exists on its own, with its own assets, debts, and ability to enter into contracts, and sue and be sued, among other things. Such misunderstanding can result in the small business owner’s failure to put into effect one of the key advantages they sought out by forming the business entity – corporate protection from personal liability for business debts and liabilities.
A phrase commonly heard from such a business owner is “I incorporated myself”. Frequently, the business owner who uses this phrase has also formed a corporation named after their own name (i.e., “John Doe, Inc.”), which doesn’t own any actual assets or bank accounts, but at the same time incurs debt. This typically occurs because the business owner in this situation attempts to create what they believe to be a “legal shield” from personal liability by “incorporating themselves,” with an incorrect belief that all debts and liabilities incurred under the corporate name cannot become their personal responsibility for any reason. On the other hand, often small business owners may deposit business revenues in the owner’s personal bank account, and/or pay personal expenses from the business funds and bank accounts as well. Such intermingling of funds and assets of the business entity with those of the owner, and treatment of corporate assets as the business owner’s own, together with and being considered in connection with other factors, can lead to potential loss of corporate liability protection, resulting in personal liability for the business owner.
To learn more about the separate legal status of business entities, and how to properly title and maintain their assets, contact a business law attorney.