Should I establish an S-Corp or is Liability Insurance enough to Protect myself from Personal Liability?


1

I'm starting a small business and I'm concerned about personal liability. I like the idea of a corporation providing some protection, but I'm uncomfortable with the notion that the corporate veil could be pierced if the corporation looks like a shell.

Wikipedia lists a number of common reasons why a judge may pierce the corporate veil. Some of the notable ones listed in the United States section:

  • Absence or inaccuracy of corporate records;
  • Failure to observe corporate
    formalities in terms of behavior and
    documentation;
  • Intermingling of assets of the
    corporation and of the shareholder;
  • Significant undercapitalization of
    the business
  • Siphoning of corporate funds by the
    dominant shareholder(s);
  • Treatment by an individual of the
    assets of corporation as his/her
    own;
  • Was the corporation being used as a
    "façade" for dominant shareholder(s)
    personal dealings;

It seems that many of these could easily be proven true for many small businesses operated by one owner or a perhaps a couple.

Speaking strictly in terms of liability, does an S-Corp provide me with any practical protection that I can't get with a liability insurance policy?

Incorporation Insurance Corporate Structure Liability

asked Jan 28 '11 at 15:23
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Mcohen75
157 points

2 Answers


1

I see that you are in the Bay Area, so it is important that you be familiar with what CA law is on alter ego liability. (Of necessity, Wikipedia is general in nature.)

The post Beware Your Alter Ego addresses CA law specifically. The following paragraphs are copied from that post:

<<<<<

Alter ego typically arises when a plaintiff sues an insolvent corporation and needs another defendant – the entrepreneur – who can pay the hoped-for award of damages. California courts apply the doctrine when (1) there is a unity of interest and ownership such that the entrepreneur and the corporation are no longer separate entities and (2) adhering to the fiction of a separate corporate entity would sanction a fraud or promote injustice. Minifie v. Rowley (1921) 187 Cal. 481, 487.

In determining whether there is a unity of interest and ownership, courts look at such factors as:

* Whether corporate and individual funds were commingled

* Whether corporate funds were used for personal purposes
* Whether adequate corporate records and minutes were kept
* Whether the corporation was merely a shell for the entrepreneur’s activities
* Whether the corporation was severely undercapitalized
Harris v. Curtis (1970) 8 Cal.App.3d 837, 840-41.

The last factor merits elaboration. Many new companies are underfinanced. However, if the invested capital “is illusory or trifling compared with the business to be done and the risk of loss,” the court may apply the alter ego doctrine. Harris at 842.

<<<<<

You have stated that you are concerned about personal liability. A corporation and liability insurance are not mutually exclusive - you probably should do both.

Disclaimer: This information does not constitute legal advice and does not establish an attorney-client relationship.

answered Jan 29 '11 at 06:13
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Dana Shultz
6,015 points

0

I recently watched This Week in Startups, episode 47, and I think they discussed the different options.

http://thisweekin.com/thisweekin-startups/twist-47-with-niel-robertson/ should be around following time:

00:22:30 Ask Jason: Jeff Lunt calls
in to ask, what is the best way to
register your business an online
service or a lawyer?


00:28:00 Legal formation and
accounting two of the most important
issues, if not set up properly from
the start it is expensive to correct

answered Jan 29 '11 at 04:41
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Tucson
714 points
  • They did discuss LLC v. S-Corp and how important it is to have your ducks in a row with the legal formation of the entity and accounting. They didn't cover this topic though. – Mcohen75 8 years ago

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