Tuesday, May 11, 2010

Incorporated-Are You Really Protected?

You have always wanted to be your own boss. You have grown tired of just being an employee. The company is offering severance packages to many of your co-workers. After talking with your spouse, you decide to accept the severance package and tap into your savings to open a sports bar. You know generally that you will need to protect yourself from being sued by incorporating your business. You have seen commercials advertising incorporation fees for as low as $100. You fill out the standard paperwork and "voila", your sports bar is incorporated and you are very proud of yourself that you saved substantial attorney fees.

Your business starts a little slow, but you still manage to turn a profit within the first year. You manage to survive the first year although you started the business with less than 25% of the recommended amount for similar type businesses. During slow business periods, you sometimes use business revenues for personal expenses and use personal funds to capitalize the business.

You downloaded some contracts from the internet to utilize for supplier contracts and made sure to sign on behalf of the business in most cases. However, there were a few contracts with some longtime friends that you signed your name personally.

One cold winter morning, you read in your local newspaper about an accident that injured five teenagers and are horrified to learn that a few of the teenagers suffered permanent injuries to their legs and arms. On the same day, you receive a call from an attorney representing the teenagers who requests to speak with your bartender about a certain man who may have frequented your bar before driving on the wrong side of the road and injuring the teenagers. The bartender verifies that the man was asked to leave because he appeared to be drunk and two weeks later, your Sports Bar and you personally are served with a summons to appear in court.

You are dismayed that the Sports Bar is being sued and thoroughly confused why you have been named in the lawsuit. At this moment you retain counsel who informs you that the opposing attorney is attempting to "pierce the corporate veil". The attorney explains that because you were undercapitalized when the business started and you appeared to be the businesses' alter ego because you commingled funds and signed contracts personally, you could be personally liable for the injuries to the teenagers even though you incorporated the sports bar.

The lawsuit drains the sports bar's resources and the lawsuit is eventually settled with your personal resources. Two years after you started the business, you are forced to sell your home and file bankruptcy.

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