You have set up a sole proprietorship. You work many hard hours and it is now thriving. You subsequently set up a corporation to run your business to shield yourself from personal liability. You continue to work hard and try always to serve your customer’s best interests. Your customers are your number one focus.
However you do not focus on your creditors/ suppliers when making the business organization change. In the process of exchanging documents with suppliers, creditors etc you forget to bring to their attention,upfront, via faxes, letterhead, business cards or any other documentation passing between you that you are now running your business as a corporation. You forget to do this because you have been very hard working to build up your business and your sole focus has been your customers.
A rescession comes along and the business slows. The suppliers and creditors are now knocking on your door seeking payment from you personally for many unpaid invoices. You answer that it is the corporation that owes the monies not you personally.
The problem with this scenario is that if you switch from sole proprietorship to corporation and do not let your suppliers , creditors know upfront the nature of the business they are dealing with, this can come back to haunt you personally. You may be held liable personally for what you thought was strictly a corporate debt. Care must be taken in this situation to notify all people you are doing business with upfront via business documents etc of the nature of your business. This way they know exactly the nature of the business organization they are dealing with and can assess their risk of doing business with you accordingly. If you fail to do so, you may not be able to shield yourself when it starts raining with the Corporate umbrella.
William Poulos, Barrister