Little Boy Selling Lemonade: “Here’s your lemonade, Mrs. Grenshaw, and here’s your receipt.
Elderly Lady in Sun Hat: “Thank you, Tommy, but the receipt says, ‘Eastside Lemonade, Incorporated.”
Little Boy: “My daddy says that I have to put that on all my receipts.”
Elderly Lady: “Oh, of course. I forgot that your father is a lawyer.”
Let’s talk about small business corporations.
A small business corporation has two primary advantages: liability protection and tax benefits. This brief article will only address liability protection. (You don’t need to be concerned about taxes if you’re selling lemonade).
If you are a sole proprietor or partner in a business, you have personal liability for the obligations of the business. The shareholder of a corporation doesn’t have personal liability for corporate obligations, but what if you are an officer or director?
An officer or director generally doesn’t have personal liability for corporate obligations, but there are exceptions to that rule (without rules and exceptions to the rules, how are lawyers expected to make a living?)
One way that an officer or director can have personal liability for corporate obligations is if the officer or director incurs the obligation personally, such as a personal guaranty of a corporate loan. The officer or director can also enter into a contractual obligation personally even though the contract it is for the benefit of the corporation.
To avoid personal liability for corporate obligations, an officer or director should disclose, in writing, that he/she is acting in a representative capacity on behalf of the corporation, and he/she should not personally guaranty corporate obligations (of course the bank won’t loan any money to the corporation without a personal guaranty).
An officer or director can also incur personal liability for harm caused to a third party if the harm results from the negligence of the officer or director. The way to avoid that type of personal liability is to be careful, and the corporation can carry officers and directors liability insurance in case you’re not careful.
This article is intended only to give a general overview of individual liability for corporation obligations. It is not intended as legal advice. For legal advice, please consult with your attorney.