Originally posted by "DStewart":
You really need to talk to a LAWYER before you jump on the LLC or Corp bandwagon.
The BIGGEST mistake the layman makes in forming either is assuming that their assets are automatically protected. The fact is that a court can AND WILL declare your assets ripe for picking in a lawsuit if the plaintiff can prove that you manage the day to day operation of the business. The judge in the case will declare that your business is, in fact, a sole-proprietorship and make your assets available to liquidation in judgement.
The thing to protect your assets in that case isn't a LLC or Corp, but LIABILITY INSURANCE. When you purchase a policy, though, make sure it not only covers the investment directly involved, but the value of all your other assets as well.
[Edit] Forgot to add this little most commonly unknown fact about LLC's and Corps...
Think you might have to go to small claims court or municipal court to get a judgement against a tenant or file an eviction? In most states, you can't represent a LLC or Corp in any court unless you are an attorney. Expect to pay handsome fees for these simple filings in which a sole-proprietor can do himself.
You are speaking about "piercing the corporate viel" and this will happen in situations when you have a company that is clearly only a shell and not an operating entity on its own right. If you use the company as it is to be used, as a separate entity, then you will be able to protect your self from litigation and liability. You have to represent yourself as managing director of the company when you sign documents or represent yourself as the work on behalf of the company. If you comingle and otherwise mix the actions and income and money of yourself and the business, then you will have a problem. If you run the company as a business with a business checking account and pay for the expenses of the business with the business checking account and simply pay yourself distributions to your personal accounts and handle all of your personal activity separatly, then you have a very good case to be excluded from liability.
Personal case. One of my businesses was being sued and it had my business named (an LLC) and me personally on the papers, because I signed the contract for the company. During pre-trial, a motion to dismiss for me personally was granted because this was an issue of the business, which is a separate entity from me personally and I was acting as a director of the business and not acting as personal business. BTW, the business won its suit as well. I only had a sh!t load of lawyer fees, but it was cheaper than anything else.
Liability insurance. Definitely a good idea and you should have it, but it is limited to the amount of liability insurance you take out on yourself. If the amount of the award from a suit is greater than your limits, then you would personally liable for that award. Insurance is just one means to help protect your assets, not the only one and you should not use only one means to protect your assets.