Do You Really Have Limited Liability?

As a business attorney, when I meet with new clients who want to form a new business, either a corporation, limited liability company (also known as LLC’s) or other entity, one of the primary motivations in doing so is to protect their personal assets from the risks of the business. It is during this part of the conversation that we discuss that “limited liability” does not equal “no liability.” In fact, it can cut both ways.

The concept of “limited liability” has traditionally meant that if a person starts or invests in a company that has limited liability, then the equity owner’s risk will be limited to the amount that they have invested in the business. Thus, if the company gets sued and is found liable for breach of contract or some other tort – such as a personal injury, then the personal assets of the owners could not be used to satisfy the judgment. But, they could lose all that they have invested in the company – hence, one of the reasons it is called “limited” liability.

There are, however, exceptions to the general rule just described. While there may be a few more to add to this list, here are the four main ones that I like to make sure business owners understand:

1. Personal acts of negligence – you will incur personal liability if the claim for injury is that you, as an individual, have caused harm to someone. Thus, if you were the one driving the company vehicle and ran over the pedestrian, both YOU and the COMPANY can be sued for damages.

2. Failure to follow required formalities – if you do not follow the statutes in properly forming and operating the business, such as making sure it is properly capitalized, or commingling company funds with your personal affairs, the business may be viewed as your alter ego. If this finding is made, your personal assets may not be protected from creditor claims, either in contract or tort.

3. Contract agreement – if you have a written contract with a third party and you have agreed to provide a personal guarantee for the debts of the business, you will not have limited liability. This situation often arises when the landlord of leased space asks for a personal guarantee, or a bank or other lender loans funds to purchase equipment, inventory or operating capital.

4. Responsible Person for tax matters – if you have decision-making authority over which bills of the company get paid and when, and signatory authority on the company bank accounts, then if payroll or other employment taxes are not paid, you could become personally responsible if the company does not deposit them on a timely basis.

If you have questions about just how limited your liability is for your business or for a business that you are considering to start, please contact our office to schedule an appointment and meet with one of our business planning attorneys.