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Personal Liability For Your Business Debts?
One of the primary reasons for doing
business as a corporation or limited
liability company is to avoid personal liability
for the debts incurred by the business; however,
merely incorporating or organizing as a
limited liability company does not guarantee
protection. You need to conduct your company's
business in a way that respects it as a separate
legal entity and maintains a clear separation
between the company's business and your personal
affairs. The body of law with respect to
corporations has evolved over decades of court
cases in Connecticut and other states. In the
case of Bastan vs. RJM & Associates, LLC, decided
on June 4, 2001, the Connecticut Superior
Court confirmed that traditional case law
applicable to corporations in this regard also
applies to limited liability companies. While
there are no hard and fast rules as to the factors
a court will consider in determining whether to
impose personal liability on a shareholder or
member (or "pierce the corporate veil," as it is
called) observing the following list of dos and
don'ts should help reduce the risk:
Do hold your business out to the public
as a separate legal entity. Your stationary,
business cards, purchase order forms, invoice
forms, checks, contracts and the like should all
include the full legal name of the business entity,
including the appropriate appendage indicating
legal status (e.g., Acme Widgets Inc.,
Main Street Services LLC, etc.).
Do make clear the capacity in which
you are acting. When acting on behalf of the
company, be clear to the parties you are dealing
with that you are acting as an agent or representative
of the company, not individually. Your
business cards, correspondence, contracts and
the like should indicate your status as an agent
or representative of the company (e.g., John
Doe, President, Richard Roe, Manager, etc.).
Don't commingle funds. The company
should have its own bank account or accounts,
which should be used for all company business
and should not be used to pay your personal
expenses (as was done in the RJM & Associates
case mentioned above).
Don't suck your company dry. You can
pay yourself an appropriate salary for your services
rendered, but you should not make substantial
distributions to yourself at times when
the company is insolvent. In order to help
minimize potential exposure, the transactions
you conduct with the company should appear
as arms-length transactions to an independent
third party.
Do maintain corporate formalities. With
respect to corporations, maintain a minute book
and document board of directors' authorizations
and/or approvals for major business transactions;
hold Annual Meetings of the shareholders
and directors. If you have a limited liability
company with a board of managers, it's a good
idea to observe the same formalities for it.
Don't mislead. Don't mislead vendors, customers
and others regarding the solvency of the
company or its financial ability to honor obligations.
Making a contract or commitment
which you know that your company will not
be able to honor falls into this category.
Unfortunately, despite your desire to limit
your personal liability, economic circumstances
and bargaining power may require that you
voluntarily agree to assume personal liability.
For example you may be asked to personally
guaranty bank loans or lease obligations. You
should pay attention to these matters and not
sign personal guarantees unless absolutely necessary.
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