In the construction world, many businesses are family owned and almost indistinguishable—from a practical standpoint—from the owners. So it’s particularly important for contractors to incorporate. In addition to possible tax benefits, incorporation protects personal assets (such as your house) from judgment and collection actions.
Incorporation works—as at least a partial shield—because the company and the owners are separate entities from a legal perspective, and a contract with one entity can’t be enforced against another. This same logic applies in the context of corporate versus individual actions (that is, the actions of one person cannot be legally attributed to another person). By extension, an individual’s assets can’t be collected to satisfy a purely corporate debt or judgment.
But simply registering with your state’s corporation commission or secretary of state and getting “Inc.” or “LLC” added to your company name isn’t enough. Not only do you need to form the company, you need to act as if the company is a separate entity from its owners, in order to keep that protection intact.
Simple things like separate bank accounts—one used to pay only corporate debts and one to pay personal debts—go a long way toward showing the separate natures of you and your company. Don’t take money out of the business account for personal expenses or to pay “salaries”—use a separate payroll account or processing system. Keep up your registrations, annual reports, and the like to show maintenance of the company.
Observe the corporate formalities, even where it seems a bit silly. You’ll be glad you did.
Christopher G. Hill is the owner of The Law Office of Christopher G. Hill, PC, in Richmond, Va. This article is for informational purposes only and should not be construed as legal advice.
Adapted from the September 2014 issue of REMODELING, a sister publication of JLC.
