Incorporating a Business: Tom's Landscaping
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Tom inherited his father's landscaping business, and incorporated the business after he read an article in Lawn News, advising landscaping businesses to incorporate. Tom has been sued by a customer, whose prize rose bushes were accidentally damaged by a landscaper. Tom called his attorney, Hector, to represent him in the lawsuit. When Hector asked for the corporate minutes, Tom said, "What corporate minutes?" Hector advised Tom that his personal assets could be taken if he lost the suit, but Tom said, "No, don't worry! I'm a corporation; I have no personal liability!" Is Tom correct? Identify and discuss the legal principle that would be applied by a court to resolve this issue, and predict the outcome of the suit against Tom.
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Solution Summary
Tom inherited his father's landscaping business, and incorporated the business after he read an article in Lawn News, advising landscaping businesses to incorporate. Tom has been sued by a customer, whose prize rose bushes were accidentally damaged by a landscaper. Tom called his attorney, Hector, to represent him in the lawsuit. When Hector asked for the corporate minutes, Tom said, "What corporate minutes?" Hector advised Tom that his personal assets could be taken if he lost the suit, but Tom said, "No, don't worry! I'm a corporation; I have no personal liability!" Is Tom correct? Identify and discuss the legal principle that would be applied by a court to resolve this issue, and predict the outcome of the suit against Tom.
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Tom's partially correct. In the past, courts have generally ruled that Tom would be held liable up to the amount of his contribution (basis) in the corporation. Tom does have personal liability. Becoming a corporation does not dissolve all personal liability in the business. It is true that a corporation provides greater liability protection than another form of business entity, like a sole proprietorship, but the business ...
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