Business Entity Mistakes Criminal Conduct and Independence
Below is a MRR and PLR article in category Reference Education -> subcategory Legal.
Business Entity Mistakes: Criminal Conduct and Independence
Introduction
In today's information-driven world, small business owners recognize the importance of protection provided by corporations or limited liability companies (LLCs). However, this protection can be compromised by certain actions.
Criminal Conduct
Establishing a business entity safeguards owners and shareholders from civil liability. Civil liability involves state and federal laws allowing compensation for alleged wrongs like negligence or breach of contract. While civil liability may require financial compensation, it doesn't lead to jail time.
It's crucial to understand that neither corporations nor LLCs shield individuals from criminal liability. Any claims suggesting otherwise are incorrect. For example, using a corporate entity to perpetrate fraud or a Ponzi scheme offers no protection from criminal prosecution. Recent criminal convictions of Tyco and Enron executives illustrate this clearly.
Maintaining Independence
Corporations and LLCs are legally separate from their investors, effectively acting as independent "persons" under the law. This distinction forms the basis of their asset protection features. Unfortunately, many small businesses misunderstand this concept, risking the loss of their asset protection when it's most needed.
To retain the asset protection benefits of a business entity, treat it as an independent entity. Avoid statements like "I own the corporation," which can undermine your legal position. Instead, clarify your role by stating your position, such as President of the entity.
Conclusion
Forming a business entity is essential for most small businesses. Ensure you adhere to all necessary formal procedures to preserve the asset protection benefits. By treating your business entity as an independent entity, you safeguard yourself and your assets effectively.
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