ExteriorContractor.com |

Everyone is concerned with potential exposure to liability, and this is especially true in the construction field. Contractors want to know how they can protect their home and other assets (bank accounts, rental properties, stocks, bonds, etc.) if they get sued by a disgruntled homeowner. There are many ways to shelter your personal assets from business-related liabilities, one of which is to incorporate your business. This means forming a corporation by filing some documents with the Secretary of State’s office and transferring your business to that corporation. Your business consists of the contracts for future work, the receivables, the trucks and tools, the business name, and so on.

While it is quite easy to form a corporation, it is not so easy to operate a corporation, especially if you have been in business as a sole proprietor for many years. When you are a sole proprietor, the money your business makes is your personal money and the debts your business incurs are your personal debts. There is really no distinction. When you form a corporation, that changes. The corporation makes the money and incurs the liabilities. Therefore, if the corporation signs a contract to remodel a kitchen and the homeowner is dissatisfied with the work, the homeowner must sue the corporation to get satisfaction, not you, the contractor. If the homeowner gets a large judgment and there are insufficient assets in the corporation to satisfy it, the homeowner cannot come after you for the balance. Thus, your personal assets are safe . . . or are they?

The problem arises when you don’t operate the corporation as a separate entity. In other words, you keep doing business the same old way. If you’re going out to dinner, you reach into the petty cash drawer and take out $100 to cover the meal; when you talk to a client, you tell them how “you” are going to remodel the house instead of how “your company” is going to remodel the house. If you treat the corporation as simply an extension of yourself, then the court can declare the corporation a sham and “pierce the corporate veil,” allowing the homeowner to reach your personal assets to satisfy their judgment. Here are some simple rules to follow to make sure that does not happen:

1. Complete all your initial corporate documents, including bylaws, organizational meeting minutes and filings with the state. Your attorney can make sure these are done correctly.
2. Have stock certificates issued to you as the owner of the company.
   
3. Hold regular corporate meetings (at least annually) and keep minutes (notes) from the meetings in a corporate binder.
   
   1 2 3 next