When a Corporation or LLC Does Not Protect the Owner (Shareholder) From Personal Liability!
I always enjoy reading the blog posts of Max Kennerly. His latest post concerns the misconception of some people that if they create an LLC (or corporation) to conduct their personal business, they are somehow exempt from personal liability. If it were only this easy, everyone would do it and we wouldn't need insurance.
I want to expand on the ideas presented by Max. Creating a corporate or LLC does create a limitation of liability for the owners for contracts entered into in the name of the company. The owners are usually agents of the company, and can enter into contracts on behalf of the company. (But not always.) Unless there is some agreement limiting authority, officers of any LLC can enter into contracts for the company. Sometimes owners claim that one owner didn't have the authority, but that is an issue between them, not the party that relied on the contract.
This concept is very different than trying to pierce the corporate veil and impose liability on the owners. The first problem is that piercing the corporate veil (of limited liability) is hard to do. If you succeed, great, but the case is much more complicated. On the other hand, naming an owner as the agent of the corporation, for the owners wrongful acts is a perfectly legitimate claim. An agent is liable for their own wrongful actions, even if they act in the name of the company. I've also seen people try to create trusts to try to avoid liability. That doesn't work either.
What happens when an owner enters into a contract in the name of the company, and then causes the company to breach the contract. Is the owner personally liable? (I am distinguishing this from the case where the owners tortiously injures someone.) Can the owner be personally liable for causing the LLC or corporation to breach its' obligations? Yes! The agent is, remember, liable for its own tortious acts. An agent is a third party - not a party to the contract. So the wrongful interference with the corporations obligations under a contract is tortious interference with the contract. So the agent owner can be personally liable for contracts as well as running people over with the corporate car.
This does not mean that every corporate or LLC owner is liable for every breach of contract of any company. The concept is limited to actions by the owner/agent that interfere with the companies performance in such a way as to show tortious interference. Most breach of contract actions are based on problems other than tortious interference. But the risk remains for the owner/agent, when they act wrongfully they can be personally responsible for the damages.
