We have all heard the radio advertisements: Set up a corporation or LLC for your business and you will protect your personal assets form company creditors.
So after setting up the corporation or LLC, why am I sued personally?
I have heard this question many times where the client set up a corporation or limited liability company (LLC) and was later personally sued for acts of the company. While use of a corporation or LLC will undoubtedly provide protection against business claims in many situations, there are exceptions worth noting.
Here are five somewhat common exceptions where an owner may be held personally liable for company debts. Personal liability means your personal assets are exposed to company creditors.
1. If the owner does not honor the separate status of the corporation or LLC, neither will the Courts. There are several cases out there where an owner intermixed his or her personal transactions with the company transactions. It is sometimes just too convenient to pay personal credit card bills, home utilities, etc. and shuffle money back and forth between company and personal accounts as needed. While these cases must be reviewed on their own separate facts, commingling company and personal transactions makes it more likely the Courts will impose personal liability.
2. An owner may be personally liable for his or her own actions in carrying out the business. The other day I spoke with someone who was sued because their own work, performed under an LLC, failed and caused injury. She was personally sued, the LLC did not provide a shield from personal liability.
3. We have all heard that the only things certain in life are death and taxes (hopefully not in that order). Many types of taxes pass through to the business owners and officers, regardless of the type of entity. Add to this that many types of taxes cannot be discharged in bankruptcy and you have great motivation to make sure taxes are paid first.
4. Likewise, Builder’s Trust Fund liability can pass through to an owner. Generally, the funds received on a construction project are held in trust for subcontractors and suppliers, failure to use them for that purpose may create personal liability that is likewise not dischargeable in bankruptcy. Again, these rules are great reasons for builders to use funds from a job to pay creditors on that job!
5. Lastly, recent bankruptcy cases have indicated that single member LLCs will not be honored in all circumstances, sometimes making LLC assets part of an individual’s bankruptcy.
The radio ads for corporations and LLCs often end by saying they are not attorneys and do not give advice on how to use the forms or operate the business. When it comes to personal liabilities and protecting assets, that advice is crucial.
