Behaving Like an Entity

When business owners form an entity under state law – either a Corporation or a Limited Liability Company – they do so to multiple reasons, the most common of which are:

  • Need for multiple owners in the business
  • Limits on personal liability
  • Tax treatment based on the type of entity selected

Simply forming the entity does not achieve the goal. When the entity is formed, it is an empty legal shell into which assets and activities can be transferred. The owners must take the steps to transfer the business activities into the entity that was formed.

Failure to complete the process, or subsequent failure to behave as an entity can cause the entity to be ignored by a court or by a taxing authority. The legal doctrine of “alter ego” applies when a corporation lacks a separate identity from one of its shareholders, resulting in an injustice to creditors. The conclusion of alter ego can cause a court to pierce the corporate veil and hold individual shareholders liable for debts of the corporation. A similar finding by a taxing authority can result in the corporation being ignored for tax purposes.

Stated another way, just because the taxpayer formed a corporation with the intention of starting a business in that corporate shell, it does not necessarily follow that the taxpayer made good on that intention. Matters of taxation must be based on what one does, not what one contemplates.

With Launch by LegalShield, it’s easy to get incorporated for just $145 + state fees. PLUS, you become a LegalShield member with access to a dedicated law firm. Your law firm is available for unlimited consultations, contract reviews, employment questions and more.

This website gives a general overview of LegalShield’s legal plan coverage. The benefits and prices described are not available in all states and Canadian provinces. See specific details on terms, coverage, pricing, conditions and exclusions by selecting your state or province in the cart.

LegalShield provides access to legal services offered by a network of provider law firms to LegalShield members and their covered family members through membership based subscription. Neither LegalShield nor its officers, employees or sales associates directly or indirectly provide legal services, representation or advice.

LegalShield works with partners and affiliates whose websites are linked with LegalShield and controlled by parties other than LegalShield (each a "Third-Party Site"). LegalShield is not responsible for and does not endorse the availability, contents, products, services, or use of any Third-Party Site, any website accessed from a Third-Party Site and does not guarantee the content or quality of the products or services provided by Third-Party Sites. If you have purchased a package that includes a Third-Party Service, the third party may contact you by email or phone with instructions on how to access your benefits, and you may be required to accept additional terms that are located on the Third-Party Site.