I recently had a meeting with a new client who had been referred to me for insight into a major problem. She had incorporated a few years ago but was being sued personally as a result of business dealings.
The plaintiff was trying to pierce the corporate veil, which is when the courts will disregard the limited liability that is normally a part of being incorporated and instead hold the corporation’s shareholders personally liable for the corporation’s liabilities. This can happen when someone mixed corporate and personal funds or, as in the case of my client, when you get a Certificate of Incorporation but don’t properly complete all the required formalities.
My client was sick with worry- “He’s suing me for $250k; could I lose my house?” I commiserated and expressed my concern for what happens when people incorporate on their own.
The next few words were a shock. “I didn’t do this myself; my accountant handled my incorporation.”
It’s always a terrible decision for CPAs to draft legal documents so I asked again to be sure. Unfortunately, her accountant had only provided her with a Certificate of Incorporation and an empty template for shareholders and directors registers. That’s it.
The corporation wasn’t properly organized and I had to break the sad news to her that it was likely that she wouldn’t benefit from limited liability protection. Her worry turned to anger and a determination to sue the accountant.
Now, if a lawyer had messed up the incorporation, our errors and omissions insurance would cover us. However, accountants are not covered if they make a mistake in preparing legal documents because that’s not what their insurance covers them to do. If you’re an accountant ask yourself if It’s really worth exposing yourself to huge liability from a lawsuit, not to mention unrecoverable legal fees, for the few hundred dollars you charge for an incorporation.
Equally important is the horrible disservice done to a client who thinks they’ve got limited liability protection through incorporation but actually still has their personal assets at risk.
Protect yourself and your clients. Refer your clients to a firm like Henry Business Law which respects the important relationship between CPA and client. My view is that lawyers and CPAs are partners in helping our clients’ businesses thrive and be protected. Our clients can only benefit when we work together!
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