The law allows you to conduct business just yourself as a sole proprietor or with someone else as a partnership. If you operate the business yourself or as a partner, then, for legal purposes, your identity is the same as the business. If your business is sued, both the business assets and your personal assets are at risk of being taken by a creditor to satisfy or pay for the judgment.
The law also allows you to operate a business in one of several different forms or entities such as a corporation or limited liability company (LLC), etc. If the business is operated as a separate legal entity, it is considered separate from its owners. Therefore, if the business is sued, only the business assets can be taken to satisfy or pay a judgment. Your personal assets are protected. This is called limited liability protection. This protection is valuable and an excellent reason to do business as an entity. However, the protection is not absolute or 100% guaranteed but is conditioned on the proper organization and operation of the corporation.
When a lawyer sues a business entity, he or she will usually sue both the entity and the owners individually. This is because lawyers know the entity often does not have sufficient assets to satisfy or pay the claim. However, the law requires the person suing to prove that the entity, the corporation or LLC, was not properly organized and operated as a separate legal entity. The legal terminology is called “piercing the veil.” If the court allows “piercing the veil,” then a judgment can be obtained against the entity and the individual owners. However, if the court determines that the party suing has not proven their case, then the limited liability protection applies. The person suing might still be entitled to a judgment against the entity but not against the individual owners and their personal assets.
The key is to properly organize and operate your entity, corporation, or LLC so that you have a strong argument if you are ever sued and are entitled to limited liability protection. Organizing and operating the entity properly is not difficult, but some specific steps or procedures should be taken to help insure your protection.