Why incorporate – or, more likely, organize as an LLC? The answer is simple enough to fill radio ads. If something goes wrong, only the company’s assets, not its owners’, will be at risk – assuming it is done right. This is true no matter how big or small the business, and whether the owners are companies too (i.e. a parent company) or individuals.
When the big boys fight over large amounts with proportionate resources, the cases make it to the Courts of Appeal and into the law books, illustrating the point. So it was for a story that started some 10 years ago with plans to build a new resort in the Bahamas. The developing company (let’s just call it the Developer) came to be owned by Marriott and Lehman Brothers. The latter’s infamous bankruptcy sunk the project, but not before the company who built the marina was owed $7.5 million by the Developer. Failing to pay was as clear a breach of the contract between the Developer and the Marina’s builder as there can be. Work was done and not paid for.
But what was there to do? The Developer no longer existed.
The marina’s builder tried to break the liability shield provided by incorporation and go after Marriott, the surviving company among the Developer’s owners. It advanced multiple theories with great imagination and creativity. It tried to say that Marriott did not just own the Developer but was also in a joint venture with it; it tried to say that Marriott had a role in pushing the builder to sign the contract; it brandied about theories like “conspiracy,” all to no avail. As the Developer’s mere owner, Marriott was not liable at all for the contractual breach, and only the resources it committed to its subsidiary were ever at risk. (It had already lost that.)
Marriott’s experience can be a lesson for everyone, down to the smallest mom-and-pop business.
Yet this is not to say that the vaunted “corporate veil” can never be pierced. While it is hard to do, if owners lose sight that their business is a separate entity, if they start commingling funds or shrug off some formalities for example, it can happen. That is why going on-line and filling out a form is not recommended. A consultation with an attorney familiar not only with incorporation and organization but with corporate formalities as well, someone who can help guide the new company, is more likely to effectively protect the entrepreneurs.