Corporate Identity as Contractor's Protection Against Liability
When an individual contractor faces liability for, as an example, construction defects, he may suffer severe personal losses. If the contractor's business is operated as a partnership, he and his partner's individual assets, not just those assets associated with the business, are eligible for recovery by the injured party. However, if the contractor's business has been incorporated, the business itself takes on a separate legal identity that can sue and be sued. The owners of a corporation are not generally liable for any losses it experiences, including those resulting from a lawsuit.
Use of the corporate form can not only extend a contractor's individual protection from liability, but it can also strengthen the contractor's business overall. Some contractors will incorporate separate entities based on the construction work that is performed. For example, the contractor may separately incorporate that part of the business that performs earth movement, such as grading and filling, and incorporate another entity that performs all other construction work. By doing so, the contractor has limited the assets that can be reached in a construction defect action. Using our example here, if the contractor has been called to task for construction defects in the framing of a house, the earth movement entity will not be called upon to pay for any resulting liability. This ensures the protection of the assets associated with the earth movement entity and, on a larger scale, ensures the strength of the contractor's business as a whole.
Though incorporation may offer protection against liability, it is not one hundred percent foolproof; the corporate existence may sometimes be disregarded. It is fairly difficult to "pierce the corporate veil." The fact that the contractor specifically incorporated to take advantage of the protections offered by the corporate form is insufficient to disregard it. However, if it can be shown that the contractor himself, the subject incorporated business, and any other businesses of the contractor are essentially alter egos of each other, there is a strong likelihood that the veil will be pierced. To ensure that the corporate existence prevails, all corporate formalities must be adhered to, each entity must be separately and adequately capitalized, and the control of the incorporated entity must rest completely with that entity.
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