Small Business Tip: Create Your Corporate Shield

The purpose of creating your corporate shield is to “shield” you as an individual from liability.  This means that if a lawsuit later develops against your company, the lawsuit would be against the company and not you as an individual.  For example, I had a client once that simply picked a name for his company and began operating as that company.  That client was later sued as himself because the company he was operating as was not a true legal entity.  In this situation, for example, the client is sued as: “Joe Smith doing business as ABC Company”.  The big problem here is if Joe Smith loses his lawsuit and gets a judgment entered against him for any amount of money, the creditor on that judgment can lien any property Joe Smith owns, garnish his wages, garnish his bank accounts, etc.  Bottom line, you want to avoid being sued as an individual for issues related to your business.

The way to create your corporate shield is usually by creating a corporation or a limited liability company.  This is very formal process which requires, among many other things, a filing with the Arizona Corporation Commission.  You need to be sure that your corporation or limited liability company is created properly with the appropriate documentation such as bylaws, issuance of stock, stockholder agreements, operating agreements, etc.  There are also tax implications involved in the choice of entity and perhaps, tax elections to be timely made.

Written by Attorney Lori Brown, lbrown@hgplaw.com

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