Hartley Bernstein explains personal liability

It is common knowledge that the formation of a corporation limits your personal liability for business debts. What is less popularly known is that it takes more than the filling out of a few papers to run a corporation. You are required to keep meticulous records of corporate tax returns and follow the corporate formalities in decision making and record-keeping. In short, you will have to be organised to maintain your limited liability. In this blog, New York based corporate lawyer, Hartley Bernstein, explains what limited liability is and under what circumstances it does not apply.

Limited personal liability

A big advantage of incorporating your business is that it safeguards your personal assets against business creditors.  For instance, if a court ruling is against you, and says that your business owes creditors a million dollars, you will not have to sell your house, or other expensive items, to pay back the debt. Corporation of your business limits your liability to corporate assets. It means that in case of a failure, you will only lose the money you have invested in corporation.

Exceptions

Limited liability does not give owners a freehand to indulge in reckless behaviour.  There are situations when limited liability does not protect your personal assets. Here are five scenarios when your personal assets are at risk:

·         If someone gets injured as a consequence of your direct actions

·         If you are the guarantor of the debt on which the corporation defaults

·         If you do not deposit taxes that you deduct from the wages of the employees

·         If you intentionally participate in fraudulent measures

·         If you treat the entire corporation as an extension of your personal affairs, and not a separate identity

Of the five exceptions, the fifth is the most important in the sense  that it is vague and it is easier for courts to rule that a corporation is an extension of your personal affairs and not a separate identity. There are a few things you can do to minimise the risk of a court ruling against you. Here are four of them:

·         Adequate investment in your corporation

·         Formal issuing of stocks to shareholders

·         Regular meetings between shareholders and directors

·         Separate records of business transactions; do not mix them personal records

This is a Hartley Bernstein guide to limited liability and its exceptions. Please visit the website to learn more about corporate law.