Being married to a lawyer, I cringe when I read how folks think incorporating and such will protect them against any and all liability.
If the liability is strictly a matter of the company's, such as a product or debt liability, then you have some protection.
As the operator of the company ( and usually principal shareholder) you can be held personally responsible for things that involve you. Claims like an injury in your shop (someone else's, not yours) can be pressed against any and all parties that have a pocket (legal term for any money). The standard suit is against the company, the operator of the company, the employee involved, the owner of the building, etc. The principal is to seek the deepest pockets.A shifty businessman may set up his company to be worthless, but with the suit against him and the company separately,the judgment just goes after his assets, since he has the deepest pockets, and the company has none.
If you are the principal recipient of the proceeds of the company, then you are usually on the list. You commonly see this in fraud suits against big corporations ( Enron, etc.), where they sue the corporation ,and the officers of the corporation, who have been making tens of millions a year, while the company was going broke.
The other place you see this is in punitive suits, like child molestation. Say a teacher fools around with a kid at the teachers house ( the school knows nothing about it). The suit will separately list the teacher, the school, the school board, and the city. Now the teacher won't have much money ( he is probably going to prison). The school and school board have insurance coverage. The deepest pockets are the City's, so the settlement is something like this:
Teacher- $20,000,which they will probably never get.
School and Board- $1,000,000 ,which is probably the policy limits of their insurance coverage.
City- $10,000,000 because they have the funds.
In an appeal ,the lower amounts may be discharged and the only amount left to stand is the deepest pocket.
This is not to say that incorporating is not good....it is. An LLC is great. But you will still need the insurance coverage. You will also need to have the company properly set up and run legally.
Final comment-
Financial wizardry to hide assets looks good on the P&L (as long as the IRS doesn't look at it), but looks bad in court. One of my lawyer friends had a client who was the owner of a good business (contractor), which was incorporated.He paid every one of his personal purchases with his company credit card ( supplies). He paid his mortgage, truck and car , and house bills with company checks ( used for company business). He traveled at company expense ( "business trips"), dined at company expense (Entertaining clients),etc. Every year the company made no money, and there were no corporate taxes owed. He drew no salary, and he paid no personal income taxes. One day he fell at work and broke his back. It took a year to recover. He quickly went through all his savings, the business was not running and there was no income,he soon had no health insurance ( the business provided it), the medical bills piled up and the house fell into threat of foreclosure. He filed for bankruptcy. The first thing the trustee wanted to see was the last three years tax filings. When he was found to have filed no personal income tax returns, and his corporation filed $0 profit returns, his case was dismissed with prejudice (meaning he couldn't re-apply). The IRS checked into it and held him responsible for the entire gross income of the company ( until he could prove where the money was spent). Then they charged him with tax evasion. Long story short, he lost everything, and spent a year in the Federal Hotel. He swore to my friend that he was told it was legal to do what he did, and no one ever gets caught.
Stacy
