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What is the potential “personal liability” of owners of a business entity?
Generally, individuals are responsible for their own conduct. The rules of agency may make an individual vicariously responsible for the acts of an agent, if that agent is acting with authority or within the scope of her employment. Some business entities limit the liability of business owners for the actions of agents of the business. This means that the owner is protected from being held personally liable for the debts (contracts) or tortious conduct of the business’s employees or other owners. That is, the business owner does not risk losing her personal assets for debts created or tortious activity committed by the business or its owners. This business entity characteristic is a strong motivation for individuals to form a business entity to carry on their business activities.
- Note: It is important to remember that a business entity offering personal liability protection to its owners may forfeit that protection if the Secretary of State’s office or the court disregards the business entity. The Secretary of State may dissolve a business entity for failing to follow entity maintenance requirements. More commonly, a plaintiff who is suing the business may attack the business entity status in an attempt to “pierce the veil”. Piercing the veil is discussed further in the corporate governance chapter.
- Example: The owner of an LLC has two employees who deliver goods to customers. One of the employees accidentally crashes the company vehicle into a pedestrian. The pedestrian can sue the negligent driver and the LLC for damages. The driver may be personally liable for his negligent driving. The LLC may be vicariously liable for the employee’s tortious act, since it was committed when the employee was acting in furtherance of the business’s operations. The owner’s personal assets, however, may be protected from the reach of the plaintiff.
Discussion: Can you identify any situations where the owner of a business has been held personally liable (either in contract or tort) for the actions of the employees of a business? Why was the business owner held personally liable despite the limited liability protections of the business entity?
Practice Question: Bert is a member of an LLC. The LLC is managed by Victoria, who is also a member of the LLC. Victoria accidentally rear-ends Gayle while driving to meet a business client. If the plaintiff decides to sue for the negligent act, will Bert or Victoria potentially be personally liable?
- Victoria will potentially be personally liable, as she is the tortfeasor (person committing the tort). The LLC may be liable, as Victoria was acting on behalf of the business. Bert will likely not be liable, as he is shielded from personal liability for debts or obligations of the LLC. It is possible, however, that Bert could be liable under the theory of “piercing the corporate veil”.