Ways to Shield you Corporation from Liability
09.19.2022 | Corporate Law
How Can I Shield My Corporation from Liability?
Incorporating a business can help to shield your personal assets from corporate liability. Are there ways to shield your corporation from liability? Unfortunately, there is no clear and guaranteed way to do that. If a corporation has violated the law, it will face liability for the damage it caused.
But you can reduce the legal risks to your corporate and personal assets by sticking to a few basic principles.
Here are three ways to reduce your corporation’s exposure to liability.
Treat Your Corporation as a Corporation
You may be tempted to think of your corporation in a personal way. But your corporation has a legal existence that is separate and independent from you. Treating it as personal will expose you and the corporation to legal liability. Some ways to maintain a separate corporate identity include:
Incorporate Correctly
Meet with a law firm that practices corporate law before you form your corporation. Speak to a lawyer about incorporating and consider hiring the firm to prepare the articles of incorporation for you.
The articles are required to be able to incorporate your business. Although the articles will call for basic information that you should know, an error at this stage can cost you money and create a risk of having an incorrectly formed corporation.
You should also consider hiring a lawyer to write your corporate bylaws and resolutions. These documents provide the blueprints for running your corporation.
Follow your bylaws. Failure to follow your bylaws can expose your corporation to liability from shareholders, officers, lenders, securities regulators, and taxing agencies.
Hire an Accountant
Hire an accountant to create and implement internal accounting processes and controls. These accounting practices should comply with generally accepted accounting principles (GAAP). By implementing and following GAAP-compliant practices, your business can substantially reduce its exposure to shareholder lawsuits, regulatory actions, and tax orders.
Create a Compliance Plan
When you think about liability, you probably think first about lawsuits. But regulatory agencies are a significant source of liability to corporations.
Consider the regulatory agencies that you deal with routinely. A lawyer can develop a plan for complying with all of the rules and regulations that they enforce.
Some examples of regulatory bodies for which you might need a compliance plan include:
- County health departments
- California Franchise Tax Board for corporate income taxes
- California Department of Tax and Fee Administration for sales taxes
- California Department of Industrial Relations for labor, wage, and workers’ compensation laws
- U.S. Federal Trade Commission and California Department of Justice for advertising regulations
Your business might have other regulatory regimes with which you must comply. You should consider speaking to a lawyer to identify the regulations that will affect your business, working together to create a compliance plan to meet your legal obligations.
This compliance plan should list all of the information that you must collect, the filings that you must make, and the deadlines for filing. By following your compliance plan, you will substantially reduce your liability in enforcement actions from regulatory agencies.
Try to Use Alternate Dispute Resolution (ADR)
When you think about liability, you probably think first about lawsuits. But regulatory agencies are a significant source of liability to corporations.
Consider the regulatory agencies that you deal with routinely. A lawyer can develop a plan for complying with all of the rules and regulations that they enforce.
Some examples of regulatory bodies for which you might need a compliance plan include:
- County health departments
- California Franchise Tax Board for corporate income taxes
- California Department of Tax and Fee Administration for sales taxes
- California Department of Industrial Relations for labor, wage, and workers’ compensation laws
- U.S. Federal Trade Commission and California Department of Justice for advertising regulations
Your business might have other regulatory regimes with which you must comply. You should consider speaking to a lawyer to identify the regulations that will affect your business, working together to create a compliance plan to meet your legal obligations.
This compliance plan should list all of the information that you must collect, the filings that you must make, and the deadlines for filing. By following your compliance plan, you will substantially reduce your liability in enforcement actions from regulatory agencies.
Mediation
In mediation, a mediator tries to help both parties to reach a middle ground between their opposing positions. For example, suppose that a supplier believes that you owe $100,000 for a shipment of vegetables. You believe that you owe nothing because about half of the vegetables arrived wet and spoiled. A mediator will try to arrive at a middle ground that is equally fair to both parties.
Arbitration
In binding arbitration, each side presents their case to an arbitrator and the arbitrator develops a resolution. Parties often prefer arbitration to litigation because it costs less and allows the parties to select the arbitrator. Thus, the parties can select an expert in the field who might have more experience in the type of dispute being presented than a judge would. For example, a dispute over stolen technology might be arbitrated by a law professor who writes and teaches about technology.
Minimizing Liability for Your Corporation
The law does not provide an absolute shield to corporate liability. However, you can work with a lawyer to find ways to reduce your corporation’s exposure to liability.
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