If you are a business owner who formed an entity, such as an LLC or corporation, to achieve the limited liability that entities are known for, is there truly complete limited liability for the owners of the business?
My answer to you is that, unfortunately, there isn't. While limited liability is the primary reason most people form an entity to run their business, there are certain circumstances under which the owner could potentially be liable for debts of the business. Luckily, these are situations that you, as an owner, can typically avoid, if you work to do that.
The first of these is piercing the corporate veil. If you own an entity and run a business, but you don't really follow the guidelines or the statutes for how the entity should be run—if you're a corporation, you don't have your meetings or don't have your articles of incorporation updated, for example—then if there's a claim against the entity, the claimants could potentially try to pierce that veil and get to the owner's individual assets.
The second situation is that many times the owners of an entity are liable for its unpaid tax obligations. If a company has unpaid sales and use taxes, or even income taxes, many times the taxing authorities are not going to let the owner of that entity off the hook. So make sure that your taxes are paid.
The third circumstance that can circumvent limited liability is a personal guarantee. I run into this all the time: a business owner, on behalf of the business, enters into a commercial lease, and the landlord requires a personal guarantee. In that situation, even if the entity goes out of business or goes bankrupt, the individual who signed that guarantee can be personally liable.
The fourth situation is professional negligence. Anybody that has a professional license is not going to be let off the hook by their state statutes if they are negligent in providing their services.
But even with these exceptions, most of the time—I would say 99% of the time—If you form an entity for the purpose of providing limited liability, you will be fine. You just have to make sure that those circumstances are covered so that your personal assets cannot be attached.
Please call me if you would like more information. You can find me at www.taylorlegal.com.
KATHERINE L. TAYLOR, ATTORNEY AND CPA
5850 Waterloo Rd