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Unread 08-27-2013, 12:15 PM   #8
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I don't want to derail this, but since LLC and liability has come up, which it often does here, there needs to be some clarification since most people think that once you set up an LLC (or even a corporatoin) and operate under the scope of that, then you are personally protected. It is far more complicated than that.

There are three types of legal "wrongs" that can land you in a lawsuit, but the two most business owners are concerned about are contractual wrongs and tort wrongs. A ”contractual” wrong is a failure to do something you agreed to do: I gave you $20 to mow my lawn, you didn’t do it, I want my money back.

Everything else is a “tort” wrong. The most common tort is negligence, which includes most lawsuits, like car accidents, getting people sick, or slip and fall. In negligence, you had a general duty to do something in a reasonable way (like drive your car safely) and you messed up, so you have to pay for the harm you caused. This is what business owners are most concerned with. Unfortunately, the LLC is good for limiting liability in contractual wrongs, not tort wrongs.

Most everyone knows, although not by name, “vicarious liability” and “the doctrine of respondeat superior.” If, in the course and scope of your employment, you cause someone else harm, then your employer is liable for your conduct.

Here’s what you probably don’t know:

An agent is subject to liability to a third party harmed by the agent’s tortious conduct. Unless an applicable statute provides otherwise, an actor remains subject to liability although the actor acts as an agent or an employee, with actual or apparent authority, or within the scope of employment.
An “agent” is a broader definition of “employee:” it’s anyone acting on behalf of the company.

Let me reiterate what that all means: the general legal rule across the country is that individuals acting on behalf of a company are personally liable for their tortious conduct, even if they did so on behalf of the company.

There's plenty of case law out there illustrating this.

Assume you hit a pedestrian with a car at a fair you were vending at, defame someone in a blog post, or cause a fire. It doesn’t matter if you were “employed” by your LLC when you did it — you will still be personally liable, as will the LLC that ”employed” you.

Thus, in order to “protect your assets,” you need to put enough money into the LLC that it can completely pay any tort judgment against you, or else the injured person can go for your assets long after it has bankrupted the LLC. That just defeats the nominal purpose of the LLC (to avoid liability), since you’ll have to pay the same amount anyway, just through the LLC.

Again, there are plenty of reasons for setting up an LLC, such as protecting investors, limiting contractual liability, limiting liability arising from employee’s conduct, and a host of business and tax uses, but avoiding personal liability for your own conduct isn’t one of them.

So, you still want to set up an LLC for many of the other benefits, but don't go into it assuming that will protect you in the event of a lawsuit. Unless your business is worth enough to cover any judgement against it, they can additionally go after your personal assets to recover damages.

That's why having good insurance is the single most important item when it comes to starting a business, even if it's a small scale operation. The LLC is nice, but if you personally do something wrong, make someone sick, or burn down the midway at the county fair, the fact that you are acting under your LLC isn't going to help you.

Sorry, rant off. My wife is an attorney, so this has always been a big discussion point whenever I've set up and managed my many businesses over the years.

Here's a link that better explains the ins and outs of the kind of protection an LLC truly offers:

Last edited by marubozo; 08-27-2013 at 02:37 PM..
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