Being liable as a sole proprietorship VS director at a corporation


2

I am considering starting presales of a product. Since money may be coming in I wanted a business bank account so if I am ever sued for any reason I'll only lose what I put in the business and not everything.

When I looked at forming a corporation I notice the director is personally liable (to an extent). This worries me. To what extent am I liable? If I sued for some reason can I lose my personal properties? (lawsuit example: failing to complete a contract, malicious competitor trying to bankrupt me by taking me to court)

Right now I am the only person working on this product. I plan to have up to 3 others for sales, marketing and help on the floor of trade shows. Likely another 1-2 people to travel on the road for training purposes and outsource the development of an addon produce. I may be able to contract all of these.

I may be the only full time person in the company. Therefore if I am sued, it would be likely something I was directly responsible for. Is there a point to forming a corporation in this case?

Or am I protected and only lose the money I put in? (excluding illegal activities) Breaking a contract is legal but the company can be sued. Will I be sued?

I am living in Ontario, Canada and interested in answer for countries/territories.

Incorporation Canada Corporate Structure Liability Sole Proprietorship

asked Apr 11 '11 at 20:18
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Stu R
66 points

2 Answers


4

There is no company structure that is going to guarantee that your personal assets will be 100% safe in the event you are sued. Otherwise that would lead to unscrupulous people taking advantage of it to harm good citizens such as ourselves. You can't protect yourself 100%, but that shouldn't be a reason for you not to "get in the game". As a business and an entrepreneur you will face many risks, but if you take the necessary steps to run your business in an honest manner, this should be the least of your worries.

However, if you are worried about your personal assets, then I would suggest you incorporate your business instead of going as a sole-proprietor. In terms of personal liability, being a sole-proprietor is not the same as owning a corporation. And structuring your business as a corporation will provide you much more protection than being a sole-prop. A corporation separates your business assets from your personal assets, and thus makes it much harder to go after your personal assets in the event your business is sued.

As Anonymous pointed out, there are actions that may "pierce the corporate veil ". Some of these actions may not even be tied to the actual incident associated with the lawsuit. For example, if you own a corporation, but mingle your business funds with your personal funds, your corporate veil may be pierced, and you may open yourself up to personal liability. Another thing that may lead to you being personally liable is if it can be shown that you acted in an intentionally malicious manner.

The example you site of failing to complete a contract, would not result in personal liability in most situations .

The legal system is a big mess, and laws will vary from one jurisdiction to the next, so if you are concerned about this the best thing you can do is consult an attorney in your area. But I would say that under normal circumstances, if you take the necessary precautions, the odds of you being personally liable for a business action are fairly low.

Good luck!

answered Apr 12 '11 at 13:37
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Zuly Gonzalez
9,194 points

2

Get General Liability Insurance if you incorporate.

As others mention, your corporation might protect your personal assets, yet liability insurance helps cover legal and other expenses regardless of the outcome. Liability insurance for at least $2 million is not too expensive (certainly far less expensive than legal fees) and your corporation can claim the cost of the premium as a business expense.

answered Apr 13 '11 at 04:15
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Erik Westermann
121 points
  • Good point. Liability insurance should decrease that fear. Thanks for adding to the discussion, and welcome to the site. – Zuly Gonzalez 8 years ago

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