You Can't Sue Me - I'm Incorporated!
After many years practicing law I am convinced that small business owners - and especially contractors - have no idea how to use a corporation or LLC to avoid personal liability for the debts of the business. For simplicity I will use the corporation as an example. But the same rules apply to any form of business that shields the owners and officers from personal liability.
When a person incorporates their business, it takes more than just filing a form with the Secretary of State. When a business is incorporated, it can't be a secret to those that do business with the new corporation. In other words, the new corporation needs to disclose the fact that the business (the party that is contracting with others) is incorporated on its letterhead, business cards, invoices and checks.
If the business does not disclosed in a meaningful way that it is a corporation, the owners and officers have probably lost the very advantage they tried to create. Several times in the last few years I have represented a client that had a claim against a business that was incorporated, but never disclosed that fact to the contracting party I represented. We sued the owners and officers directly, along with the corporation and an identically named company as an assumed name of the owners. The businesses in question used letterhead that did not disclose their corporate status, and their contracts likewise were silent as to their corporate status.
The legal theory is simple: an officer of a corporation is an agent for the corporation. Agents have two very important obligations with respect to other parties they are dealing with. The agent must disclose that they are an agent, and disclose the identity of the principal. How does the agent do this? By using letterhead and other information that clearly identifies the real contracting party is the corporation. There are a number of cases on point, and the decisions are universally the same. The agent to an undisclosed corporation is responsible for the debt or obligation. By failing to disclose, the agent become the principal to the transaction, and personally responsible. In a 1985 case the defendants truly got lucky when the court decided that the principal corporation was disclosed because the defendants used some checks with a corporate designation.
I always hear the argument from the opposing counsel in these cases that the defendant didn't need to disclose because all the plaintiff had to do was check with the secretary of state. Unfortunately, it is not the obligation of the contracting party to figure out who they are contracting with; it is the obligation of the agent to disclose. This has been the law for decades. So until the law changes, business owners better disclose. Don't look for a change anytime soon, this rule has been in the Restatement's for years. A Cargill Elevator case from the 1920's is a fun example of what can happen. This case is still good law.
If the agent doesn't disclose the agency and the identity of the principal, which is often the case with small businesses, the agent is personally liable as a principal in the transaction. This is not rocket science; it is the law. So my advice to small business owners is: disclose, disclose and disclose.
