Starting a business involves a certain amount of inherent risk. While entrepreneurs must be willing to take some risks, there are steps they can take to reduce these potential risks, both to the business and to themselves. When forming a business, entrepreneurs can choose a legal structure with limited liability. By legally separating the business from themselves, owners can at least know that if the company faces financial distress, their individual assets will not be exposed to company liabilities. However, limited liability is not absolute. There are several ways that business owners can be personally liable even when their company provides a liability shield.
Limited liability means that business owners and investors can lose only the money they invest in a company. They are not personally liable if their company faces creditor claims due to a lawsuit or debt. Business creditors can reach the company assets an individual has invested in a business, but not the individual’s private assets. Common types of modern business structures that provide limited liability include the limited liability company (LLC), limited liability partnership (LLP), and corporations.
Although courts are generally hesitant to impose personal liability on a company’s owners, they may do so in some situations, such as the following:
The term “piercing the veil” applies not only to corporations, but also to LLCs and LLPs. Typically, courts will not pierce the veil simply because a creditor will not otherwise get paid. Veil piercing requires evidence that the company was somehow used to perpetuate fraud or abuse the limited liability structure. For example, the court may decide that veil piercing is appropriate in the following scenarios:
Keeping the limited liability of a corporation, LLC, or LLP intact requires knowing and preventing the circumstances that can eliminate the liability shield. Specifically, owners should understand the following and take the following steps to maintain limited liability:
Our attorneys can help you with your limited liability planning. For assistance with these and other business law, tax planning, or estate planning matters, contact our office today!
Legal Disclaimer – The information provided is designed for general information only and is not intended to be legal advice, nor does it create an attorney client relationship. Consult an attorney before making any legal decisions based on your individual circumstances.