Startup entrepreneurs can choose to organize their new businesses in several different ways. One popular form of business organization is incorporation and filing taxes under Subchapter S of the Internal Revenue Code, which offers the limited liability advantages of a corporation but the pass-through taxation of a sole proprietorship. While this is a common corporate form for small and medium-sized businesses, the limited liability offered by corporate status is not absolute. You can still be sued personally, even if you operate as an S corporation.
Incorporating your business insulates you from liability for things that other shareholders or employees do in the course of business. In a sole proprietorship or partnership, your employees and partners are considered your agents, or your personal extensions. This means that if your employee or partner does something in the course of business that causes damages to another person or business, the plaintiff will sue both the employee or partner and you. Incorporating your business creates a limited liability shield; your employees and shareholders will be considered agents of the corporation, not you personally. This means that your personal assets are generally protected from their wrongdoing.
While the limited liability shield can insulate you from personal liability for things your employees or fellow shareholders might do, it doesn't protect you from getting sued for something you did yourself. People can almost always be held personally liable for their own acts. If you're driving a company car on the job, and you cause an accident through your own negligence, you can be sued because you caused the wreck, and the company can be sued because you were on company business at the time of the wreck. Other shareholders, however, enjoy protection from suit because you were working for the corporation, not them.
Structure and Reporting Requirements
You can also get personally sued if you didn't set up your corporation the right way. You must take care to scrupulously obey the formalities of your state's corporation laws if you want the protection of the limited liability shield. You can limit this risk by hiring a lawyer or purchasing state-specific incorporation forms from a reputable source, but it will still be your responsibility to comply with any state reporting requirements. If you don't, a plaintiff's lawyer will attempt to pierce the limited liability shield and reach your personal assets by claiming your corporation doesn't actually exist.
Another reason you can be personally sued, even though you've incorporated your business, is if you disregard the corporate form and commingle your personal and business assets. Using corporate funds or assets for your own personal benefit or keeping your personal money and business money in the same account, can help a plaintiff's lawyer convince a court that your corporation is a sham. It can also hurt you to engage in business activities that aren't covered by your corporate charter.
References & Resources
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