Limited Liability of a Corporation

Corporations have certain financial protection in lawsuits.

If a corporation is engaged in a lawsuit, certain protections allow the company owners from being directly targeted. The corporate acts as a unique entity, which means its liability is limited to corporate assets. Any assets not part of the corporation are exempt from any financial awards as a result of a lawsuit.

Protection

One of the reasons a corporation is formed is to protect the business owners from certain liabilities. The appeal of limited liability can make even a small business owner consider filing to become a corporation. While you might think of corporations as giant companies, some corporations can be formed by a single person. Even if you're a single person corporation, however, certain rules must be followed, including electing directors to your corporation, as well as officers. Some states also want you to issue stock shares of your corporation and to set up banking procedures for the corporation. You can also incorporate in a state other than the one you are operating in. For example, many companies have incorporated in the state of Delaware due to various tax benefits and extensive limited liability protections granted by the state, as well as having lax requirements for electing officers and board members.

LLC

Some people confuse the abbreviation "LLC" for "Limited Liability Corporation," but it actually stands for "Limited Liability Company." Corporations are entirely different structures from LLCs and have their own protections from liability. However, corporations and LLCs create a separate business unit, distinct from the owners. In the event of judgment in a lawsuit against the corporation, the personal assets of the company owners can't be seized.

Petition

When a corporation is involved in a potential lawsuit, a legal tactic to protect its assets is to petition the court for a limitation of liability. By doing this, the corporation accomplishes two goals. First, the corporation can go to trial more quickly. In the event of a class action lawsuit, the faster the trial takes place, the more likely not all possible participants will join the lawsuit. Second, by being granted limited liability, there is a solid financial figure to deal with, as opposed to an unknown sum at the end of the trial.

Dissolving

Corporations are able to be dissolved. When it gives up its corporate status, in many states, the shareholders are protected from any liability claims that show up after the corporation no longer exists. However, states such as California allow the shareholders of a dissolved corporation to be liable for corporate debts, provided the shareholders received a portion of any assets once the corporation was dissolved.

References

• LLCs Explained: Introduction to LLC Formation
• Yahoo Small Business: Advantages and Disadvantages of Forming a Corporation
• Maritime Accident Attorney: BP Oil Spill Injury Claims
• eMinutes: Zombie Corporations in California: Personal Liability Lives on for Four Years After Corporate Dissolution; Jeffrey Unger
• State of Delaware: Incorporating in Delaware
• Teen Analyst: Why Incorporate in Delaware?; Chris Stallman; June 2005