Many business owners mistakenly believe that they cannot be held personally liable for actions that were committed by or through their company. Although setting up your business as a separate legal entity is definitely a good way to separate the liability of your business for the liability of the individual owner, such as yourself, it does not automatically completely shield you from personal liability in all situations.
Piercing the Corporate Veil
One way in which it is possible for you to be personally liable even though you have a corporation or an LLC, is that a person or company can pierce the corporate veil, and sue the owner of the business entity personally. When a company was formed or used for an improper purpose, a court can disregard the corporate entity and pierce the corporate veil and reach an owner personally in situations of fraud, illegal activity, or comingling of funds.
However, a corporate officer or member of an LLC can also be held personally liable for a wrongdoing committed by the entity if he or she is sufficiently involved in its commission. Although members and owners of an LLC or officers and directors of a corporation cannot be held vicariously liable for a company’s wrongful acts simply because of their positions, if an officer or director directs or actively participates in the commission of the tortious act of the company, both he and the company can be held liable. Take for example the following scenario:
“I am the sole owner of a painting business. I used to run the business as a sole proprietor, but last year I formed a limited liability company so that, if my business were to get sued for some reason, I could protect myself from any personal liability and keep my personal assets safe. Everything was going well until a few months ago when I went to a customer’s house with one of my employees for a painting job. Both my employee and I worked on this job – he worked on the bedrooms and I took care of the living room – and everything seemed to go fine. After we finished the job, however, the customer complained that I had somehow gotten paint on one of the priceless antique rugs that was in her living room. I know that I didn’t, because all of the floors were completely covered, but she insisted that it had to be my fault. Now, not only has she sued my company, she has sued me personally. I thought that, if I started and LLC or corporation, I could not be held personally liable for anything done on behalf of my business. She can’t go after me personally, can she?“
In this case, because the owner was personally involved in the actions (the painting of the home) that the customer alleges resulted in her damages, even though the owner was acting on behalf of his company, he can be held personally liable for the damages suffered as a result of his conduct, because every individual has a duty not to engage in conduct that creates an unreasonable risk of harm to another. In this case, both the owner and your company had a duty to protect the customer’s home and belongings from being damaged while the owner was onsite providing the company’s services.
Ready to Get Started?
Law 4 Small Business, P.C. (L4SB). A little law now can save a lot later. A Slingshot company.