Many business owners mistakenly believe that if they negligently cause injury to a person or property that only the company will be liable and they (and their personal assets) face no exposure. The reality is that even if you operate your business as a corporation or LLC, the owner (member or shareholder) can face lawsuits attaching personal liability for the owners’ individual actions. This is one of the most misunderstood issues we see with new business owners trying to understand the extent to which formation of a company protects the business owner from personal liability.
The easiest types of liability an LLC or corporation can protect an owner from are liabilities for contractual duties for which the company and the company only is the performing party (i.e., contracts, loans without personal guarantee, etc.). On the other hand, actions of the owner or management falling in the legal category of torts (negligence, breach of fiduciary duty, fraud, etc.) can still be brought against an owner personally. Individual liability of an owner can also fall in the intersection of contract and tort law as the owner who is actually performing the work may be be held personally liable for negligent work even if the work was being performed under a contract between the client and the company. The legal issue at play here is actually quite simple -- an individual is responsible for their actions, whether they are on the clock at work or not.
The easiest case of where a business owner can face personal liability and where their corporation or LLC would offer little protection is in the area of personal injury law. Take the example of an owner making a delivery to a client and while in route negligently causes an injury in an automobile accident. In that case, the owner (as well as the company) would be liable. Another example is where an owner could be held liable for negligently hiring or negligently supervising an employee that causes injuries while on the job. Common allegations we see is that the employee was not properly screened or trained, and the negligent act of the employee causing injury could have been avoided altogether had the owner not allowed the employee to have been in a position to cause the harm in the first place.
The common misconception that the company protects the owner from all liability often stems from the scope of insurance coverage. Based on the terms of the policy, the company’s insurance often covers the negligent acts of the company and its agents (such as owners, officers, and employees). In that case it is insurance that protects the owner from personal exposure. The critical combination of corporate policies plus adequate insurance is what business owners need to protect personal assets.
This is obviously a general overview and there are numerous ways in which skilled litigators can attempt to attach personal liability that are beyond the scope of this article. However the two main take away are:
(1) The company, itself, does not act as a legal shield for all personal acts and liabilities; and,
(2) Adequate insurance is typically the tool that fills the void and offers the real protection business owners are seeking.
Reed F. Morris is a Colorado business and real estate litigation attorney with Mallon Lonnquist Morris & Watrous, PLLC, based in Denver, Colorado. Reed regularly represents businesses and individuals in business transactions and disputes, from pre-filing through trial. He can be reached at firstname.lastname@example.org.