Let’s talk about one of the most important reasons that a business owner will form a legal entity to house the business in the first place, which is to limit liability.
Corporations and Liability
A corporation is an independent legal entity created under state law with a legal existence that’s separate and distinct from its owners. Corporations really are the most widely accepted and well-established entities for investors to protect themselves from personal liability for the actions and debts of a business.
You must make sure to comply with all the corporate formalities. That means there’s no evidence of of an alter ego to the business owners, you’re maintaining accurate corporate records, you’re not intermingling corporate and personal assets, you’re maintaining an arm’s-length relationship with related parties, and you’re papering proper board and stockholder approvals.
Generally speaking, a stockholder of a corporation will only be held personally liable for the actions and debts of the business up to the amount of such stockholders’ investment, regardless of the stockholders’ involvement in the management of the business.
LLCs and Liability
Like a corporation, an LLC is an effective shield against personal liability, subject to one caveat: there are some courts that have held that a single-member LLC—in other words, an LLC that just has one owner—is not protected against personal liability. So single-member LLCs can be a little tricky and advice from legal counsel is strongly recommended.
The bottom line is that corporations and LLCs really both provide a good shield against personal liabilities for the owners of the business provided that the business owners pay attention to the appropriate corporate formalities.
About Scott Bleier
Scott’s practice is focused on the representation of entrepreneurs, emerging technology companies and venture capital investors. Scott specializes in corporate and securities law; private financings; and mergers and acquisitions.
Scott has worked with technology companies and their founders in a wide array of industries, including software, e-commerce and internet, life sciences, biotechnology, retail, consumer products, manufacturing, and healthcare information and management. Scott serves as outside general counsel to his company clients, advising their boards of directors and senior management on a broad range of corporate matters, including company formation, founder equity structures, financing transactions, corporate governance responsibilities, equity-based compensation strategies, employment issues, intellectual property, and commercial transactions. Scott also regularly represents these clients in mergers and acquisitions, including a significant number of sales transactions with large, public companies.
In addition, Scott devotes a significant portion of his practice to the representation of venture capital investors, negotiating and structuring portfolio company investments on behalf of these clients.
Scott also represents established foreign companies seeking to expand their operations to the United States.
Scott speaks regularly on entrepreneurship, start-up companies and financings, delivering presentations to entrepreneurs, investors and lawyers at the Cambridge Innovation Center, Swissnex Boston, the American Bar Association and the MIT Enterprise Forum. Scott currently chairs the Venture Capital Transactional Issues sub-committee of the Business Law Section of the American Bar Association.
Scott is a frequent writer on topics involving start-up companies and corporate law. You can follow Scott on Twitter at @bleierlaw.