Does Incorporation Protect Me from Personal Liability?

Does Incorporation Protect Me from Personal Liability?

Incorporation

Does incorporation protect me from personal liability?

Yes, incorporating your business does provide a layer of protection from personal liability.  However, it is important to keep in mind that there are times when that protection does not insulate you completely.  This is referred to as piercing the corporate veil. In this part one of our two-part segment, the broad duties and protection requirements for insulation are discussed.

Protection requirements:

There are primarily two requirements that must be followed in order to maintain corporate protection:

1) The Rule of the Prudent Person.  Board members are trusted individuals and this protection is provided as it is assumed that the board member will act reasonably for the best interest of the business.  The prudent person rule essentially states that board members are protected from personal liability as long as they act “as a reasonably prudent person under the same or similar conditions”. So basically, if your peers would think you acted contrary to your duty, then the protection may not be available.

2) Duty of Loyalty. As a board member, conflicts of interest should be avoided.  Therefore, the protection otherwise provided may not be there if actions or decisions are made to benefit yourself instead of the business.  Commonly, this occurs when a board member votes in favor of an action to provide himself or his family with financial gain or support a business venture he owns.  Keep in mind, while financial gain is a typical motive, it is not required to breach the duty of loyalty.

Risk Management:

Create bylaws which prohibit personal gain at the business’ expense or doing business with companies who benefit board members. Be sure to encourage board members to think through all key decisions and document decision reasoning in minutes.

If you need bylaw or incorporation assistance, please contact us. We would love to work with you.

Check back next week for part-two of this segment, which will address the other factors to consider in order to avoid piercing the corporate veil.