By James T. Stimler, Esq.
Personal Liability Misconceptions Still Exist for LLC and Corporate Investors. Investor personal liability concerns for business obligations go well beyond the generally known facts that a sole proprietor and a general partner are personally liable for the obligations of their business. While businesses formed as a Limited Liability Company (LLC) or a corporation bring important “liability shields” when properly set up in legal agreements/documents, not all personal liability can be avoided by investors if they are an owner or involved in the operation of the business, such as serving as an officer or board member. Following are some liability concerns that a smart investor should consider before becoming a limited liability company member or a corporate shareholder, especially if the investor intends to be involved in the operation of the business:
One’s Own Actions
An investor involved in the operations of the business can be held personally liable for their own actions (automobile collision during her/his course of duties for the business) or a contractual transaction where the investor did not disclose to the third-party vendor that she/he was acting on behalf of the business entity. Investors need to be cautious and mindful about personally guaranteeing company/corporate loans and vendor credit accounts, because banks and vendors will most assuredly pursue collection from the investor if those obligations are not paid by the company/corporation.
Not Paying Full Purchase Price Amounts for Units (LLC) or Shares (Corporations)
An investor can be personally liable for the obligations of a limited liability company or a corporation to the extent that the investor did not pay the full amount of the agreed purchase price for the LLC member units or corporate shares. This is also true if the full amount of the stated “par” value of corporate shares is not paid.
Non-Payment of Certain Employee Taxes
An investor, sometimes even if she/he has not been actively participating in the management of the operations of the LLC or corporation, can find that she/he is personally liable for the non-payment of certain employee taxes. These taxes include: employee income tax withholding, FICA, Workers’ Compensation premiums and unemployment premiums of the LLC or corporation in which she/he invested or its predecessor LLC or corporation.
Prioritizing Distributions over Obligations to Creditors
An investor can be forced to refund to the LLC or corporation the distributions or corporate dividends the investor received (interim or at liquidation-wind up) which were paid to the investor that contributed to the inability of the LLC or the corporation to pay its creditors who were known to exist at the time of the distribution or dividend.
An investor acting as a corporate director or LLC manager can be forced to pay company obligations because of LLC or corporation distributions or corporate dividends the investor authorized (interim or at liquidation-wind up) that were paid to the investor(s) that contributed to the inability of the LLC or the corporation to pay its creditors known to exist at the time of the distribution or dividend.
A Special Note to Remember – A member of a member managed LLC is assuming the liabilities of a manager or board of managers member. The shareholders of a corporation operating under a close corporation agreement will have the liabilities of a corporate director, if corporate directors are eliminated in that agreement.
SUMMARY: The formation of an LLC or Corporation can provide important business personal liability shields to investor members and corporate shareholders, but business entity formats do not absolutely shield the business investor in all cases.
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This blog article is for general educational purposes only and may not be relied upon as legal advice from the author to the reader.
© 2018 James T. Stimler, Esq.
Image: “[Soldier wearing armor, with shield.]” by Vinkhuijzen, Hendrik Jacobus is licensed under CC0 1.0