LLC and corporations: are you protected? – Daily business journal
By Jason Rebraca
Johnson & Johnson law firm
YOUNGSTOWN, Ohio – In my burgeoning litigation career, I have encountered an alarming number of corporate litigators who – through their own conduct – have compromised the liability protection generally afforded to such entities. These self-inflicted injuries can mean the difference between limited liability and personal liability.
Below, I’ll go over a few reasons why a business owner might still face personal liability even after going to great lengths to set up and operate a limited liability entity.
More often than not, the person who forms the LLC or corporation does not actually operate (or hold themselves out) as the LLC or corporation. For example, the business owner affirmatively incorporates “A-1 Services LLC”, but operates as and presents itself as “A-1 Services”.
Companies that have created a limited liability entity but do not make it clear to their customers that the limited liability shield exists may be exposed to personal liability.
The solution here is simple: contracts, letterheads, business cards, and even signage should clearly identify the limited liability protection associated with that entity by explicitly including “Inc.”, “LLC,” or “Corp.” “. if applicable.
Additionally, some business owners mistakenly believe they are entitled to limited liability protection by using a fictitious name. Although a person can contract, sue, be sued, and hold title to property under a properly registered fictitious name, the fictitious name does not provide a liability shield, making the registrant still subject to personal liability. .
The person who uses a fictitious name when entering into a contract is the real party to the contract. Similarly, a deed to a fictitious name is actually a deed to the person operating under the fictitious name.
Or a business owner can form an LLC and not flush out the ownership structure with an operating agreement. If the company can be tightly held by a small number of owners, or even by a single person, the “legal fiction” of the limited liability company should nevertheless be perpetuated by this type of management document.
The absence of these types of documents allows a litigant to plausibly allege that the limited liability entity is a sham, or has not been conscientiously operated as such, and therefore individual members should face personal responsibility.
Although courts are generally reluctant to impose personal liability when limited liability is ostensibly attempted, the well-documented corporate litigant probably seems more legitimate in the eyes of a jury than the litigant whose annual minutes have been written on a bar towel.
The fundamental legal principle here is called “piercing the corporate veil”.
Courts use this term when the shareholders of a company are held personally liable for the debts of the company. In certain circumstances – such as those described above – the corporate form is ignored, or breached, for the express purpose of reaching the assets of individual shareholders of the company.
When a person misuses the corporate form as a shield against liability for their own wrongdoing, Ohio law will allow the piercing of the corporate veil as a rare exception to the guiding principles of limited shareholder liability.
Ohio looks at three specific factors to determine whether a claim can be passed on to a member or shareholder.
A claimant must establish three things.
First, the party must exercise control over the company so completely that the company has no mind, will or existence of its own. Second, those who will be held liable must commit a fraud or an illegal act or a similar illegal act against the person seeking to ignore the legal person. Finally, an unfair prejudice or loss must result from the control.
So please be careful with the paperwork. And beware of online services that offer fast, easy, and cheap corporate or LLC registrations.
I recently reviewed documents for a client who used such a service that guided him in setting up a limited partnership. Unfortunately for him, the limited partnership structure was completely inappropriate for its intended business use. A limited liability company made much more sense.
Business owners take tremendous pride in their work. Make sure you start from a good foundation and respect the benefits of your chosen entity.
Copyright 2022 The Business Journal, Youngstown, Ohio.