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Using Incorporation as a Liability Shield

To achieve 'inside-out' protection, incorporating is essential. The only other option is to form a LLC or LLP. Incorporating will not completely protect you from every business creditor, incorporating or setting up an LLC is nevertheless important to protect yourself against most business-related lawsuits and provides fundamental protection.

Advantages of Inocorporating is as follows:

  • Incorporation protects you from common lawsuits: Shield your personal wealth from common lawsuits against businesses when you incorporate. Negligence claims (slip-and-falls, car accidents, etc.) or claims by employees (responsibility for the acts or omissions of your employees, employment discrimination, etc.) are common lawsuits that can be complex, expensive and destructive. Incorporation also protects you from corporate contract claims and debts that you did not personally guarantee.
  • Incorporation protects you from customer claims: Incorporating usually limits claims by customers resulting from the sale of goods or services to the corporation. Product liability claims, negligence, breach of warranty and employee's malpractice lawsuits that often bring huge jury awards can be confined to the corporation and not affect individual shareholders, officers or directors.

However, Incorporating will not protect you from personally guaranteed debts. In many startup or small corporations an officer or principal stockholder might be required to personally guarantee corporate debts. For example, a landlord may demand the owner's personal guarantee on a corporate lease, in which case the landlord would have legal recourse against the owner in the event of a default and can then sue the owner personally on the guarantee. Incorporating also won't protect you if you personally cause harm. For example, if you negligently cause an accident with a corporate vehicle, both you and the corporation can be sued. Similarly, a physician could be personally liable for malpractice, even if the doctor was employed by an incorporated group practice or another entity.


The best defense is a good offense.