Cunningham On LLCs: Liability Shields – Shareholders

To print this article, all you need to do is be registered or log in to Mondaq.com.

Originally published by New Hampshire Business Review

LLCs have several key characteristics that make them a better type of business entity for most owners.

If you are a member or director of a New Hampshire LLC, or are planning to form a New Hampshire LLC, you and your business advisors should have a solid basic knowledge of LLC law and taxation to to succeed. This is the first of a series of columns in this journal that will give you this knowledge.

The New Hampshire LLC Liability Shield

Under the New Hampshire LLC Act, your LLC has many important legal characteristics. But the two most important are these:

  • Your LLC provides you with a key form of asset protection that attorneys call a legal liability shield.

  • Your LLC offers you billing order protections (a complex but powerful form of LLC asset protection that I will discuss in my next column).

Here’s what you need to know about your liability shield:

  • LLCs get that name not because they have liability shields, but because they give you one.

  • If a third party sues you as a member or manager of your LLC – for example, for negligence or breach of contract – simply because you are a member or manager, your LLC Liability Shield will most likely prevent the courts, that they whether state or federal, to transfer your personal property – for example, your home, money in your bank accounts, your car, or your investments – to the applicant. Other major types of New Hampshire business entities — for example, partnerships — do not provide this protection, and you should not conduct a business without this protection.

However, if a plaintiff alleges that the harm your LLC caused was the result of your own personal fault – for example, negligence – your liability shield will not protect you if the plaintiff proves that claim.

  • Additionally, under a legal doctrine called “piercing the veil,” your LLC liability shield will not protect you if a plaintiff proves that you, as a member or manager of your LLC, used it to commit a serious misconduct, for example, fraud or embezzlement.

Liability shields are great, but liability insurance is best. You must obtain the maximum available liability insurance appropriate for your LLC’s business.

  • The liability shield of a multi member LLC is better than that of a single member LLC. Should your spouse or another person you trust be a minority member of your LLC?

It is true that liability shields are available not only to New Hampshire LLC owners, but also to owners of all of the other major types of New Hampshire non-LLC entities. These include shareholders of corporations, limited partners of limited partnerships, and all owners of New Hampshire registered partnerships and partnerships.

This gives rise to a key LLC legal question: Which of the above types of New Hampshire business entities offers the strongest liability protection?

The answer is that the liability shield provided to owners of other unincorporated entities is just as strong as the LLC liability shield. However, all of these liability shields are stronger than the corporate shield.

Indeed, if corporate shareholders and their directors and officers fail to comply with one of the many classic “social formalities”, such as keeping minute books, the shareholders themselves may be personally liable for damages caused to third parties by their companies. None of these formalities apply to LLCs (or, for that matter, any other unincorporated entity).

However, LLCs have other key legal characteristics that make them, for most New Hampshire business owners, better than the other major types of New Hampshire unincorporated business entities.

Practical advice

Here are the main practical tips you should take away from the discussion above:

  • Don’t expect your LLC Liability Shield to protect you if, acting on behalf of your LLC, you engage in personal wrongdoing. This is a major reason why you should maximize your LLC liability insurance.

  • Be sure to take all the necessary measures to avoid piercing the veil. (I will discuss these steps in a later column.)

  • If you run your business as a corporation and have significant personal assets, you should consider converting your company to an LLC. New Hampshire law facilitates these conversions.

John M. Cunningham Of Counsel, Corporate Department

The content of this article is intended to provide a general guide on the subject. Specialist advice should be sought regarding your particular situation.

POPULAR ARTICLES ON: US Corporate/Commercial Law

What’s wrong with ESG ratings?

Cooley LLP

About a year ago, the Brookings Institution hosted a roundtable on the role the SEC should play in ESG investing and invited SEC Commissioner Hester Peirce to address the roundtable.

ESG reporting…close enough might not work

Ankura Consulting Group LLC

Have a nice summer… while you were on vacation (still on virtual leave), regulators were busy identifying Environmental, Social and Governance (ESG) reporting standards…