One of the most common questions we hear when a client is starting a new business is “How can I make sure that I am protected from liability?” This critical question should be asked when considering any new business venture. The most effective method of limiting one’s liability in a new business venture is by forming a legal entity that will become the responsible party in any business contract. A common entity used to accomplish this goal is a limited liability company (an LLC).
Overview of an LLC and similarities to Corporations
If properly formed, an LLC can serve to limit the liability faced by its owners, which in the case of an LLC are known as members. Typically an LLC is more flexible than a corporation regarding the transfer of ownership and operations, and it is well-suited for companies with a single owner. Unlike a corporation, an LLC is not required to have a board of directors or officers and can be managed by the members.
Guaranties and Piercing the Corporate Veil.
It is critical to understand that the limited liability offered by an LLC does not imply that members are protected from personal liability in all circumstances. Most loans and leases entered into by an LLC, especially a newly formed LLC, will require that one or more of the members guarantee the payment or performance of the loan or lease. In these cases, any such guaranteeing member would be exposed to potential personal liability if the LLC does not pay or perform as required under the loan or the lease. Courts can also hold a member of an LLC personally liable by what is called “piercing the corporate veil” of the LLC, specifically, in cases where a member has committed fraud, made intentional misrepresentations, or when the loan, though in the name of the LLC, was actually solely for personal benefit of a member and not the company. Attorneys have also attempted to “pierce the corporate veil” by proving that the company was actually never properly formed or was simply a sham company formed for the purpose of shielding the alleged, wrong-doing member from liability that he or she should rightfully face.
Eric R. Thiergood, Sr.
Phone Number: 281-367-1222
Fax Number: 281-210-1361
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