Forming a Limited Liability Company (LLC) is a popular business entity type for entrepreneurs for several reasons. They are generally simple to form and offer the business owner personal protection from the actions of the business.
However, these protections are “limited” and not all-encompassing. While a business owner will generally not be held liable for the debts and contractual obligations, an owner will be held liable for actions taken that cause personal injury or harm to another during the course of business activities. In addition, an owner can be harmed for negligently hiring an employee and that employee injures someone.
For example, if an owner is operating a company vehicle and hits a pedestrian, they will be liable for the injury caused to the pedestrian. Additionally, if an owner hires an employee to work heavy machinery who has a history of dangerous behavior when using the machinery and that employee injures someone while working, the owner may be held liable for the actions of the employee. Because the employee had a history of dangerous behavior when using heavy machinery, the owner had notice that the employee was prone to activity that could injure someone, therefore he may be held liable.
While these examples are oversimplified, LLC business owners should not naively believe that they are shielded from all liability of their business. It is important for owners to act with care to identify and evaluate risks associated with their business activities. Owners then must take steps to minimize risk. One way of minimizing that risk is to maintain an operating agreement that explicitly states when and how a company will protect its officers from harm. This could be included in an operating agreement under the indemnification clause. Business owners must also maintain the business structure by conducting only reasonable and legal operations in relation to the company. If a business fails to conduct its business reasonably and legally a Court could conclude that the company’s status as an LLC should be disregarded and all privileges of a shield for the owners as well. This is called, “piercing the corporate veil.” If the veil of the LLC is pierced, the owners will not be able to claim the protections that the LLC provides and will be opened up to personal liability.
In conclusion, the limited liability protections of a LLC are not absolute. Without clearly defining and following the companies operational agreement it could lead to little to no protections for the owners. Owners must be sure that their actions will not open them up to personal liability. Whether you are in the forming stage or have been operating for years, a well written operating agreement is one key piece to protecting a Limited Liability Company. The experienced attorneys at Nowlin Scott Law Firm are available to assist business owners as they establish their business entity and maintaining their business.