Personal liability can devastate the accumulated wealth of a lifetime of work. This form of liability opens the individual to claims for a wide range of business obligations. Most people realize that personal liability may extend to business losses, but other obligations may also reach individuals, including:
- Damage awards in lawsuits;
- Tax deficiencies and penalties; and
- Back wages and benefit payments.
Example: Sam operates a trucking company as a sole proprietor. One of his drivers causes an accident that kills or severely injures several people. If the company's insurance and assets are inadequate to cover the damages awarded in the wrongful death suit, the plaintiffs may try to enforce the judgment against Sam’s personal assets.
The limited liability offered by incorporation shelters business owners from personal liability. Certain types of insurance can also help cover business owners, directors, and officers. However, if an owner or director performs certain personal acts, behaves illegally, or fails to uphold statutory requirements for corporate status, he or she may face personal liability despite the corporate shelter.