by Tom Makeig, a lawyer who serves entrepreneurs

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Thomas H. Makeig, with offices in Fairfield, Iowa, is a 1981 alumnus of New York University School of Law and is admitted to the practice of law in Iowa and New York. This blog does not offer legal advice, which requires confidential personal communication with a lawyer. NOTICE TO THE PUBLIC: The determination of the need for legal services and the choice of a lawyer are extremely important decisions and should not be based solely upon advertisements or self-proclaimed expertise. This disclosure is required by rule of the Supreme Court of Iowa.

Thursday, August 27, 2009

The limits of limited liability

A business owner should always conduct his or her business through a limited liability entity, typically a corporation or limited liability company. This ensures that under most circumstances the business owner will not be liable for the obligations of the company, and the owner's or owners' investment will be limited to money and property contributed to the company.

There are important exceptions to the rule of limited liability. A NON-EXHAUSTIVE list of business obligations for which the business owner can be liable includes

  • Payroll, sales and use taxes
  • Obligations that you have personally guarantied
  • Business torts (like fraud or intentional interference with another's business) committed by the company through the acts or omission of an individual or individuals
  • Losses of investors in the business if the company and its promoters have failed to comply with the registration or anti-fraud requirements of the securities laws.
Professionals (doctors, lawyers, accountants, architects, etc.) in most states also cannot eliminate their liability for professional malpractice.

A creditor can overcome or "pierce the corporate veil" (hold an owner responsible for an obligation of the company) under a variety of circumstances. The most common weapon for piercing the veil is an allegation of fraudulent transfer, meaning that the obligor (the owner in this case) made certain transfers of money or property from a limited liability entity under circumstances that left the entity unable to meet its current or anticipated obligations. For this reason, establishing your limited liability entity should be done carefully and EARLY, long before insolvency looms.

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