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How effective is a corporation or LLC in limiting your liability as a small business owner-operator? |
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Monday, 29 December 2008 16:48 |
How effective is a corporation or LLC in limiting your liability as a small business owner-operator? | | | | | | While there are a lot of reasons for forming a corporation or an LLC to operate your business, for most people, the top reason is probably to limit your personal liability as owner-operator. Many small business owners are surprised to find out that forming a corporation or an LLC is not an impenetrable shield against personal liability. In fact, the small business corporation or LLC is more of a “screen” than a “shield”. As such, you need to carefully maintain your corporation or LLC to maximize its effectiveness as a shield against personal liability. Furthermore, you should view incorporation as just one element in the risk management plan for your business and your investment. | | | Can I be held liable if my business can’t pay its suppliers and landlords? | | | | Yes, in some circumstances, you could be held personally liable for debts of the business, despite having a corporation or LLC. Typically, suppliers and landlords will require a small business owner to personally guarantee the corporation or LLC’s contract or lease with them. A personal guarantee is used to hold you, the small business owner, personally liable for the debt if the business fails to pay. Generally, a personal guarantee is set out as a stand-alone contract. Sometimes, however, the small business owner will be named as a party to the contract. In those cases, you could have primary liability for any performance required, or debt incurred, under the contract, and the supplier or landlord may seek payment from you if the business fails to pay. | | | Can I be held liable if my business can’t pay its taxes? | | | | Yes, in some circumstances. Both federal and Nevada law impose liability for certain unpaid taxes on certain owners, directors, officers, and employees of a corporation or LLC. On the federal level, if a corporation or LLC fails to remit certain “trust fund taxes” (e.g. payroll taxes) to the IRS, the IRS can seek payment not only from the business, but also from any person responsible for remitting those taxes. | | | | Nevada law (NRS 360.297) imposes “joint and several liability” on responsible persons for many unpaid taxes, including sales and use tax, business tax, live entertainment tax, liquor tax, tobacco tax, as well as a host of others. Responsible persons in Nevada include officers and employees of corporations, and members and employees of LLCs, whose job it is to collect and remit the tax. Bear in mind that it could be very difficult to blame someone else in a corporation or LLC if you are the only officer and/or member. | | | Can I be held liable if my business can’t pay its wages and salaries? | | | | It depends. Under the law of some states, some officers and management-level employees may be held both criminally and civilly liable for unpaid wages. In Nevada, however, an officer or management-level employee can face a criminal or administrative penalty for the corporation or LLC’s failure to pay wages, but generally cannot be held civilly liable for the unpaid wages. See Boucher v. Shaw, 124 Nev. Adv. Op. No. 96 (2008). In other words, the Labor Commissioner may come after you personally as an officer or manager, but the employee generally cannot. | | | Can I be held liable if my business gets sued? | | | | Yes, in some circumstances. Plaintiffs will frequently add owners of the corporation or LLC as parties to a suit against the small business. The Court may allow the Plaintiff(s) to “pierce the corporate veil”, and hold the owners of the corporation or LLC personally liable, when there is intentional misconduct, fraud, or reckless behavior. The Court may also allow the Plaintiff to “pierce the corporate veil” in cases where the corporation or LLC is insolvent and it would be unjust not to impose personal liability on the owners (e.g. using undercapitalized shell entities to defraud creditors). Generally-speaking, if your business harms a person purely by accident, and the business is otherwise well-run, the corporation or LLC will ultimately work to limit the personal liability of its owners (even if they are named in the suit). | | | How can I find out about limiting my liability as a small business owner-operator? | | | | A good place to start is by contacting your attorney. Your attorney should be a counselor and a risk manager, someone who can point out potential pitfalls for your business and help you address them. Your attorney can review your corporate or LLC documents (i.e. articles, bylaws, operating agreement, resolutions, minutes, etc.) and key contracts to make sure that your business respects corporate formalities and makes the most of the corporation or LLC. Your attorney can study your operations and suggest additional strategies for managing risks to your business (e.g. insurance, waivers, releases, indemnities, contractual provisions, etc.), so that you are not relying solely on the corporation or LLC to shield you from personal liability. Consulting with an attorney is an effective step in preventing problems before they happen, and before they become expensive. | | | My business is already in trouble. What can I do? | | | | If your business is already in trouble, you are going to need help from an attorney. Get in touch with an attorney right away. | | | | You may need help salvaging your business and paying the business’ debts in an orderly manner. An attorney can guide you in complying with the law and prioritizing issues and in negotiating payment plans or other arrangements to get your business back on track. | | | | You may need an attorney to help settle a dispute with someone or to defend you in a lawsuit. | | | | In either case, your situation is unique, and you should contact an attorney to discuss your specific circumstances with her. While you are probably short on cash and time, relying on legal information found in books or the internet cannot substitute for legal advice specifically tailored to your situation. There are good attorneys at your disposal, who will work out payment plans and alternative billing arrangements to help you regain control of your situation. | | | | If you are in need of an attorney, or would like more information about anything discussed above, please feel free to contact me at: | | | Teale Advocate | 1600 E. Desert Inn Rd. | Suite 282 | Las Vegas, NV 89121 | | | (702) 369-0039 (tele.) | | |
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Last Updated ( Monday, 29 December 2008 19:42 )
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