Top 5 Risks to an LLC’s Personal Liability Protection

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Top 5 Risks to an LLC’s Personal Liability Protection

There are several good reasons for entrepreneurs to set up their new business as a limited liability company (LLC) or corporation — chief among them being the personal liability protection that each structure affords the owners.

However, there are situations where an LLC or a corporation will NOT provide personal liability protection, including if a business owner:

Personally guarantees a business loan.

It is not unusual for a lender to ask owners of a new venture to sign a personal loan guarantee for an unproven business. If you decide to do that, you need to be aware that your LLC or corporation provides you with no liability protection for that particular debt. In addition, if you use your personal credit card for a business debt, you have no liability protection for that debt either.

Signs a contract individually.

This is a very common but potentially costly error since signing an agreement with your own name, individually, instead of on behalf of the business means you have agreed to be personally responsible for meeting the terms of the agreement.

Breaks the law.

Your LLC or corporation will not protect you if you break the law. This also applies if you make a misrepresentation on a credit or loan application.

Incurs a negligence or malpractice claim.

Attorneys, doctors, and other professionals that are at risk for personal liability lawsuits on the grounds of negligence or malpractice should have professional liability insurance to cover these claims.

Pierces the corporate veil.

To maintain a “corporate veil” –the legal separation that creates personal liability protection — you must observe certain corporate formalities, no matter the size of your company. These include keeping records on corporate bylaws, bank accounts, stock ledger, corporate meeting minutes, and conducting all business in the name of the corporation or LLC.

Failure to maintain compliance can result in what is known as “piercing the corporate veil,” which is a legal finding by the court that in fact, a business does not exist separate from its owner — in other words, the business has been operating as an “alter ego” instead of as a separate and distinct business entity.

Under the alter ego doctrine, the legal liability protection of the entity can be set aside by a court if it is found that the company was used as a mere shell by persons or other entities for a wrongful or inequitable purpose. If a court finds that the owners of a corporation or LLC used that entity as an extension of themselves or misappropriated corporate assets to enrich themselves, the alter ego doctrine may apply.

Williams Mestaz, L.L.P., has the experience and reputation that you want when you are dealing with a business-related lawsuit. We are here to obtain the best possible outcome for your situation. Do not hesitate to contact Williams Mestaz, L.L.P., at (602) 256-9400, and see how we can help you resolve your legal matter.

 

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