Lawsuit Protection through Incorporation – Does it Work?

I recently came across a conversation between two business friends. One was thinking of incorporating because he had heard that incorporation can protect you from being sued personally. Well, I’m not a lawyer, and can’t give legal advice. But from what I have read that is absolutely untrue.

Incorporating will not protect you from getting sued. There is no way to set up your business structure to completely avoid frivolous and nonsensical lawsuits.

However, with that being said, the reason why many businesses choice to incorporate, and why they think it can protect them from being sued, is because corporations provide something known as “the corporate veil”. But it is no panacea. In most closely held corporations like most of us are, it can be done. This is known as “piercing the corporate veil”.  Keep in mind that in the case of a big lawsuit where there are sky-high damages they can, and most certainly will, come after your personal assets, regardless of your corporate structure.

Incorporating definitely has additional benefits. While it may not be a good substitute for liability insurance, it does help save on taxes and in general betters the business’ accounting practices, as well as other benefits. Your accountant can advise you further on this.

But the only way to protect yourself is with solid business practices, thorough internal procedures, outstanding customer support, and good old insurance.  But don’t take my word for it, check with your lawyer. I am, after all, just a guy with a blog.

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