Many consultants and websites selling LLCs advocate that sole providers or small internet companies with a single driving personality form a Limited Liability Corporation. The most cited reason is asset protection.

Asset protection as a reason for an LLC for a single person entity as an explanation presents various dangers of misunderstanding. Many legal theories allow for recovery against individuals for purportedly “corporate” acts. The most commonly known is “piercing the corporate veil”. This is where a court allows an individual to pursue the shareholders personal assets. In studies it has been estimated the veil is pierced in approximately %40 of the time in one shareholder corporations and virtually never in excess of 9. Piercing usually occurs on the basis that the corporation was an “alter ego” of the shareholder or the conduct of the corporation is “unjust or fraudulent”. There are frequently five important factors looked to commingling, undercapitalization, failure to follow formalities, failure to keep separate books, and failure to hold shareholder meetings. For the sole consultant it can be seen that most if not all of the time these factors will not be met. For your entity to be sufficiently capitalized you would need to pay yourself a regular salary. Indeed, if the only services provided were your own the corporation would be literally be your alter ego. Also if the corporation lacked funding to pay you then you would be misrepresenting the material fact that the corporation intended to perform the contracted services when you signed the contract. This would be fraud and would be a personal act opening yourself up to punitive damages. Indeed, if you thought the corporation would protect you then your responses to requests for correcting deficiencies in contractual performance would be powerful evidence you intended to defraud.

In fact for any tort or criminal act you will always be liable under a basic principle of agency law. “An agent who does an act otherwise a tort is not relieved from liability by the fact he acted on command or account of the principle”. For the small consultant any competent lawyer could probably almost always construe any breach of contract as a tort. If the corporation lacked money to pay the consultant then signing would be fraud, Indian site submitter spammed and ruined reputation then negligence in hiring, leaking of secure information again negligence. That’s without even piercing the corporate veil.

So what is a corporation good for? Well, asset protection is a legitimate use where you are providing a computer program or other packaged good. Then you can argue the rights to the good are a corporate asset. The best practice would be to put into the contract a statement that all parties agree all recourse is to the corporation. Using that language for a service contract however could be evidence of fraudulent intent. The major asset protection argument’s real use is to protect against the negligence of employees or premises liability. (I would always recommend an LLC for a landlord). So a consultant who frequently repackages services would have a stronger reason to need a corporate entity.

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