I have discussed previously why contractors need to incorporate. Among the many reasons to incorporate are possible tax benefits and the protection of personal assets (like your house and your dog) from judgment and collection actions. This latter reason is key in the construction world in which Murphy can look like an optimist and projects have so many moving parts that something is likely to go wrong.
The reason incorporation works as at least a partial shield is that the company and the owners are separate “people” or entities from a legal perspective and a contract with one “person” cannot be enforced against another. This same logic applies in the context of corporate versus individual actions–i.e., the actions of one person cannot be legally attributed to another person. By extension, the assets of an individual cannot be collected to satisfy a purely corporate debt or judgment.
However, just registering with your state’s corporation commission or secretary of state and getting “Inc.” or “LLC” added to a nifty construction company name is not enough. As a recent Eastern District of Virginia District Court case (discussed here by my pal Bret Marston) reminds us all, 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. This is particularly true in construction, where many businesses are family owned and almost indistinguishable from a practical standpoint from the owners.
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. The corollary to this is: Don’t just 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 and annual reports, etc., to show maintenance of the company. Even with my law firm, where I am the only owner and employee, I am sure to keep these distinctions intact so that I don’t fall into the trap of merging personal and corporate liability.
In short, be sure to properly observe the corporate formalities even where it seems to be a bit silly. You’ll be glad you did.