Why being incorporated might not protect you

Why being incorporated might not protect you

This is it, you launched your business! Simple question, what type of legal entity have you chosen to start your business?

Entrepreneurs often debate between being an independent contractor or choosing to incorporate. I have written more on this topic in a previous article called “Great, you’re incorporated! Why though?” If you choose to incorporate, are you truly taking full advantage of the perks it comes with?

One of the advantages of the incorporation is that you will be protected against the creditors of your business. This protection is due to the fact that creditors will not be able to attack your personal assets but rather your company’s assets. In other words, if your business has debts and it has difficulty paying them, your house, your car, your personal savings are protected.

But you have to be careful; here are 3 situations in which the protection one acquires with incorporation is not applicable.

1. You have personally agreed to guarantee the repayment of the loan for your commercial activities

Owners of new and small businesses often find themselves personally guaranteeing themselves for bank loans or contracts with their suppliers. They must do so until their business develops good credit and is able to assume debts. The moment you personally guarantee the repayment of a loan, rent or a contract, you become responsible for the company’s debt if it is unable to make payments.

You must then remember that personal guarantee for the repayment of a loan disqualifies you from the protection that incorporation offers.  

2. You have signed a contract under your name

When you sign a contract for services, contracts with partners or suppliers, beware when the moment comes for you to sign. Make sure to check if you are signing under your name personally or in the name of your business because it really makes a difference. For example, if Laura Williams signs a contact with her supplier under her name only, she becomes personally liable for the debt that may occur.

You must remember to sign as an owner or an administrator of your business. In other words, Laura should as Laura Williams, president of ABC Company Inc. By doing this, your business becomes part of the contract and is liable in case there is a problem.

3. You are using your personal credit card for your business expenses

When you launch your business, your personal finances and those of your business are often tied together. In the moment, if can seem simple and inoffensive to use your personal credit card to pay your business expenses but it goes back to what was mentioned in point 1 of this article. If you pay with your personal credit card, you risk making yourself personally liable for the repayment of the debts instead of the corporation.

You must remember to pay with the business’ funds or get a credit card under your company’s name. Nonetheless, if the bank has asked that you personally guarantee the credit card, then you will still be personally liable to repay the debt in case there is one. How do you know if that’s your case? Always take a look at your contract and the terms and conditions.

For example, a clause stipulating that the commercial borrower and individual borrower are responsible in solidarity with each other for the obligations or if the request for the credit card is signed under the name of the commercial borrower and the individual borrower.

We hope you get it by now. The protection of your assets is not an automatic advantage; only under certain circumstances do entrepreneurs get to fully enjoy these perks right when they launch their business.

If you're wondering which legal entity is best for you, just give us a ring and we'll happily help you choose. 

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