On-line Incorporation Services: One Size Does Not Fit All

Should you use an on-line incorporation service to create your firm?

Well, do you buy your suits off the rack and hope it fits perfectly? Or do you have one tailored to fit properly? Almost no one can buy a suit off the rack without adjusting the pants, the waist or the shoulders. It’s the same with legal services. If you are happy with a cookie-cutter approach to problems, then by all means use an on-line service. These shops are cheaper than what an attorney will charge. But they do not offer the perspective that a business needs as it grows. No matter what, there will be gaps in the incorporation service’s product. Things that should have been tailored to the special circumstances of your company or that can be done easily now or expensively later.

For example, when you start your company, you don’t have to worry about votes and filing amendments to the corporation papers with the various state agencies and the IRS, and reporting the changes to the various parties who have an interest in any changes in the corporate structure (creditors, lenders, tax authorities).

Of course, even a customized set of corporate documents may have to be altered in the future. But it will be your material, and will be easier to alter.

Historically, people who ran businesses as sole proprietors or partners were personally liable for all debts of the business. A corporation will provide limited liability for the owners of the business; the most they have at risk is what they have invested. However, it will not provide protection for you for acts that you, personally, take for the business.

In addition to the question of piercing the corporate veil, if you sign a contract—a lease, a mortgage, a credit card application for the corporation, you may be expected to personally guarantee the contract; if so, you will still be personally liable for the debt.

Second, and this is the real problem, most small businesses are run by the owners.

If you own a small business, chances are you are highly involved in running it. And that can present legal problems, despite being incorporated. Why? If the business does something that causes harm, then chances are you will be sued, in addition to the business entity—not on the basis of your ownership of the business, but on the basis of your running the business. If you are driving the business vehicle and get into an accident, they can sue you personally because you were the driver. If one of your employees gets into an accident while working for the business, they may be able to sue you, individually, for negligent hiring/retention/supervision/entrustment. If someone slips and falls on the ice outside your business, to the extent that you were responsible for making the decision to remove the ice, as manager, you can be sued personally. If a tenant gets hurt on your rental property, they may sue you as property manager. What I’m getting at is this: If you are involved in running the business, chances are you are going to be liable for the debts of the business, notwithstanding that you have a corporation or LLC or LLP.

So what should you do? The best thing to do is to get insurance, and a lot of it.

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