As discussed above, a corporation can sue and be sued. If the corporation can’t pay its creditors, those creditors can’t go after the assets of the shareholders just because they’re shareholders. But, it won’t protect you if you’ve done something wrong.
An example illustrates this. Say your business is incorporated and operates a bakery. The corporation owns a truck for the delivery of bread to customers. Since you’ve just formed the business, you’re the only employee. So, after you bake the bread you deliver it using the truck.
Unfortunately, one day you hit a pedestrian.
After she recovers, she sues. First, she sues the corporation because you were on company business when you drove the truck that ran her over. Then, she sues you because you drove the truck. Unfortunately, the corporation won’t protect you because you personally drove the truck. In other words, just driving the corporate truck won’t protect you. Instead, you’ll be liable to the pedestrian because you drove the truck that hit her.
Lets change the example a bit. Instead of you driving the truck, it was your trusted employee Jack who drove the truck and hit the pedestrian.
In this situation, the corporation will protect your personal assets. Since you didn’t personally do anything wrong, the corporation’s assets alone would be at risk for the pedestrian’s claim.
Jack, however, would have a problem since he was driving the truck.
This means that the corporation’s limited liability provisions may not be as advantageous if you are the only shareholder and the only employee of a service business. While the corporation would protect you from claims that the corporation breached a contract, it might not protect you from personal injury and tort claims such as malpractice, accidental injury to other people and similar accidents.
In that situation, a limited liability company might be a better alternative.