If a lawsuit is brought against a business or LLC, it’s not unusual for a shareholder or member to be named as an additional defendant. This means that someone is seeking a judgment not only against the company, but also against its owner. This raises an important question. If you incorporate or form a Limited Liability Company to shield shareholders or members from liability, how does one become personally liable? Why and when are lawsuits brought against persons individually?
To be protected from personal liability it’s important to understand some basic concepts. Corporations or limited liability companies exist in part to shield the personal assets of shareholders or members from personal liability. However, the protection is there when and if the liability arises from acts which the company performs. Defrauding a customer, or engaging in a business transaction that is beyond what the company was set up to do, are both non-protected activities.
The legal concept is that the “corporate shield” must be used fairly and cannot allow someone to escape responsibility for illegal acts. Also, an owner can be held liable for business debts by using his or her name when signing contracts, rather than signing in the company or LLC name. It may seem like a mere formality, but making sure that every contract is properly signed closes the door to personal liability. Entering into business without a signed contract can open the door to personal liability if a client is not satisfied.
Attorneys are eager to find ways to win their cases and one way to do that is by adding a business owner to the list of Defendants. They may seek to bypass the business entity and go directly to the owner for compensation. Retaining legal representation to help you understand how to avoid personal liability and how to avoid errors of this kind will help maintain the protection that business owners expect by doing business as a corporation or LLC.