Forming a corporation limits your personal liability for business debts, but running one takes work.

Most people have heard that forming a corporation provides "limited liability" -- that is, it limits your personal liability for business debts. What you may not know is that there's more to creating and running a corporation than filing a few papers. You'll need to keep good records to handle the more complicated corporate tax return and, in order to retain your limited liability, you must follow corporate formalities involving decision making and record keeping. In short, you've got to be organized.

Limited Personal Liability

One of the main advantages of incorporating is that the owners' personal assets are protected from creditors of the corporation. For instance, if a court judgment is entered against your corporation saying that it owes a creditor $100,000, you can't be forced to use personal assets, such as your house, to pay the debt. Because only corporate assets need be used to pay business debts, you stand to lose only the money that you've invested in the corporation.

Exceptions to Limited Liability

There are some circumstances in which limited liability will not protect an owner's personal assets. An owner of a corporation can be held personally liable if he or she:

• personally and directly injures someone
• personally guarantees a bank loan or a business debt on which the corporation defaults
• fails to deposit taxes withheld from employees' wages
• does something intentionally fraudulent or illegal that causes harm to the company or to someone else, or
• treats the corporation as an extension of his or her personal affairs, rather than as a separate legal entity.