Why Should I Incorporate?

As you know, a corporation is a legal person. As a legal person it is separate from its stockholders, its officers, its directors, and its employees. This means if a corporation is sued, all it can lose is what it has. People who sue the corporation cannot attach the assets of the individual Shareholder. The corporation limits the liability of the individual person who is associated with it to the extent of his actual investment in the company.

Let's say you set up a corporation, a legal person. Let's say you put $10,000 into that separate legal person in exchange for stock. You now own stock in the corporation and the corporation has $10,000. Now let's say the corporation you formed takes $7,000 and buys a vehicle to use in the corporate business. Let's say it takes the rest of the money and hires an employee. You tell your corporate employee to take the corporate vehicle and go run an errand. Your trusty employee goes out with the corporate vehicle and proceeds to run over someone. Now you have a problem, because the negligence of that employee will be imputed to the corporation. It almost always is, and you will probably be no exception.

The good news is you can rest a lot easier than many people in this situation, because you had the foresight to incorporate your business. All that you have at risk is the $7,000 car and a couple of thousand dollars in cash. Not bad when you consider all of your personal assets would be on the line otherwise.

A wrongful death lawsuit such as the one that would result in our example could easily run into millions of dollars, exceeding insurance policy limitations and coverage. A lawsuit like this would ruin most people; incorporation is needed protection. I cannot urge people strongly enough to be prepared. Prepare for the worse, and hope for the best. There are also lawsuits that come from employees to consider, such as wrongful termination, discrimination or sexual harassment.

There are customers who could sue for service failures, loss profits, damage to reputation, slander, and more. There are suppliers who could sue, people who just walk across your yard and slip or step into a hole, can sue. The possibilities go on and on.

According to the National Center for State Courts more than 19 million civil lawsuits were filed in the United States in 1992 alone. This trend is continuing. According to Jack Farls, President of the National Federation of Independent Businesses, in an article printed in "The Chronicle" of Centralia, Washington on May 19, 1995, "the toll of just one lawsuit can be so great that guilty or innocent, many firms shut their doors, lay-off their employees and vanish into legal graveyards." Everyone knows about the famous multi-million dollar McDonald's hot coffee suit. In the months since that jury award, dozens of similar suits have been filed against restaurant owners.

Sexual harassment is more and more a danger faced by small businesses. This past June, Wal-Mart was on the receiving end of a $50 million sexual harassment verdict from a Jefferson City, Missouri jury.

Still other outrageous lawsuits fill today's newspapers. According to an article in the Harrington, Texas "Valley Morning Star" from August 7, 1995, a Texas Wal-Mart store was charged with a $5.5 million jury verdict because it allegedly sold .22 caliber bullets to a 19 year old teen, who put them into a pistol that was accidentally discharged on a fishing trip.

Even more outrageous was the case involving an Alabama physician who purchased a brand new black BMW. The physician took the BMW into a body shop to have it "gussied up" and the body shop discovered that the car had been previously painted. Since it had been slightly damaged in shipment, BMW repainted the car. The physician, doing what seems to be all the rage, sued BMW and as a result won $4,000 in compensatory damages and $4 million in punitive damages because his car had been painted twice. The examples of ridiculous and outrageous lawsuits go on and on. The fact of life today is that this trend is real and it could happen to you.

The courts are full of real life examples of huge lawsuits. If you are unincorporated and you fire an employee, or just get one upset, you could be facing a lawsuit for wrongful termination and/or intentional infliction of emotional distress, emotional damage, breach of covenant of good faith and fair dealing, and on and on. The lawsuit could not only take business assets but personal assets of yours as well. Incorporation would limit your liability and protect you.

It's a risky world out there in business. Incorporating doesn't eliminate lawsuits, but it cuts down on a person's deep pockets. Generally, all an incorporated business risks is what's in the corporation. The personal assets of Shareholders are not at risk, valuable protection in a litigious, dangerous world.

Why should a business person risk all of his own assets he has spent a lifetime building up? Why should he risk his family's welfare? There's no good reason, especially when they can do a simple thing like incorporating to limit their exposure. It's such a simple, economical process and yet it's overlooked so often or put off until it's too late.