A corporation is an incorporated entity designed to limit the liability of its owners (called shareholders). Generally, shareholders are not personally liable for the debts of the corporation. Creditors can only collect their debts by going after corporate assets.
Given this separate legal existence, one of the primary benefits of doing business through a corporate entity is the general rule that individual shareholders and officers are usually not personally liable for the debts and liabilities of the corporation.
If your business falls under the sole proprietorship structure, you and your business are legally the same. So if you incur business debts, the creditors can legally come after you for payment. In the case of a general partnership, the matter is the same. Each partner owes 100% of the debt the business fails to pay.
Sole trader structure
A sole trader is a person running a business in their own name; bearing all the rewards and the risks. Typically, sole traders have unlimited liability for all business debts and any litigation. A sole trader structure has no legal distinction between the business and the owner.
That being said, according to section 22(1) of the Companies Act, if a company carries on its business recklessly or with gross negligence, with the intent to defraud any person or for any fraudulent purpose, the directors and prescribed officers can be held personally liable.
A sole proprietor may delegate decision-making authority to employees and independent contractors, but is ultimately the person responsible for the business' liabilities, debts, and tax obligations, for example.
C corporations provide limited liability protection to owners, who are called shareholders, meaning owners are typically not personally responsible for business debts and liabilities.
If the corporation or LLC cannot pay its debts, creditors can normally only go after the assets owned by the company and not the personal assets of the owners. However, the business owner can also be held responsible for corporate or LLC debts in certain situations.
Piercing the corporate veil refers to the legal doctrine that holds owners, members or shareholders of a corporation or LLC personally liable for the business's debts and obligations when they fail to maintain the company's separate legal existence from their personal affairs.
By running your business as a corporation instead of a sole proprietorship, you generally protect yourself from personal liability for the business's actions or debts. In essence, the corporate veil ensures that the business and its owner are treated as distinct legal entities.
Tortious Conduct by Members:
Members can be held personally liable for their own wrongful acts, even if those acts are performed on behalf of the LLC. For example, if a member commits fraud or engages in negligent conduct that causes harm, they can be personally sued for damages.
Unlimited Liability
A business owner with unlimited responsibility is liable for all losses, debts, and other claims against the company. Unlimited liability is the term used to describe the legal obligation business owners and partners bear for all company debts.
Courts can, in some cases, hold individual owners, members, or shareholders personally liable for business debts and obligations. This is where piercing the corporate veil comes in. Piercing is possible if the owners fail to maintain a separate legal existence between their personal affairs and the company.
As a sole proprietor, your house, car, and other personal possessions could be seized to pay for the debts your company has incurred. On the other hand, if your business is a corporation or a limited liability company (LLC), you can escape personal losses if your business fails.
Despite business entity selection, business owners, shareholders or members may become personally liable for business debts and obligations if they sign personal guarantees. For instance, business owners may be put in this position to obtain financing for the business from a bank.
Debts under corporate insolvency
While a company's debts are not the directors' debts, if the company continues incurring debts at a time when it cannot afford to pay its debts as and when they fall due,then the directors can be liable for these debts.
LLCs and S corps have much in common: Limited liability protection. The owners of LLCs and S corporations are not personally responsible for business debts and liabilities. Instead, the LLC or the S corp, as the owner of the business, is responsible for its debts and liabilities.
Like most states, California doesn't permit personal creditors of an LLC member to have a court order that the LLC be dissolved and its assets sold to pay off the creditor. So, fortunately for you and your fellow LLC owners, you don't need to worry about your company involuntarily closing due to your personal debt.
Depending on the structure of a business, the business owner(s) can have limited or unlimited liability. This means that they may have either partial or full responsibility for the company's losses and debts.
The answer is that a corporation can only act through its agents – such as its officers, directors, and employees. Under the legal doctrine of respondeat superior, a corporation can be held vicariously liable for the actions of its employees while they are employed and acting within the scope of their employment.
Sole Proprietorship
The owner shares in the business's profits and losses. Since the sole proprietor is self-employed, self-employment taxes must be paid. There is no liability protection for the owner. The owner is liable for all debts.
Corporations have always been liable for the contracts and obligations that directors, officers, and employees enter into on their behalf. Absent a severe abuse of this power to contract by an individual employee or director, any contract in which the company receives a benefit will attach to the company.
The main difference between an LLC and a corporation is that an LLC is owned by one or more individuals, and a corporation is owned by its shareholders. No matter which entity you choose, both entities offer big benefits to your business. Incorporating a business allows you to establish credibility and professionalism.