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Business Entity Mistakes - Criminal Conduct and Independence

Posted on May 12, 2024 by Michael Smith

In this age of information, most small enterprises understand they want the protection supplied by a corporation or limited liability company. Such protection, however, could be lost though certain actions.

Criminal Action

Creating a small business entity only protects a small business and shareholders from civil liability. Civil liability comes from a body of state and federal law which allows for compensation for alleged wrongs. These wrongs can arise by means of negligence, contractual breach and so forth. If an entity is available civilly liable, it must pay compensation, but no jail time is involved.

Neither a corporation, limited liability company nor any entity will protect anyone from criminal liability. Claims to the contrary published on various internet sites are simply just wrong. An individual forming a corporation to front for a ponzi scheme or scam to defraud consumers will probably receive no protection from criminal prosecution. For those who have any doubts with this issue, simply think about the recent criminal convictions of the Tyco and Enron executives.

Standing Apart

Both corporations and limited liability companies are believed to "stand apart" from their investors for legal purposes. Essentially, both entities are believed to be "persons" beneath the law. This legal fiction is, needless to say, what gives rise to the asset protection component of both entities. Unfortunately, many smaller businesses hardly understand this distinction and lose the asset protection once the most require it.

To keep up with the asset protection great things about a small business entity, you need to treat it being an independent party. For example, you don't "own" a corporation. Such statements will come back again to haunt you whenever a plaintiff's attorney presents them in court while arguing the entity is really a sham. In order to avoid this problem, it is possible to simply say you're the President of the business enterprise entity or whatever position you possess.

In Closing

Forming a small business entity is really a necessary step for some small businesses. After the entity is formed, be sure you follow the required formal procedures to keep asset protection.