As a business owner in Massachusetts, you likely chose to form a limited liability company (LLC) to maintain separation between your business and personal assets. You operate with the understanding that if your business incurs debt or faces a lawsuit, your family’s home, personal savings, and vehicles are safe.
However, there are specific situations where a court can look past the LLC and hold you personally responsible. Various scenarios may occur that can penetrate your liability shield.
What Your LLC Protects
Under the Massachusetts Limited Liability Company Act, an LLC is a legal entity separate from its owners. This structure means the LLC itself is responsible for its debts and obligations. If a client sues the LLC for breach of contract, or if the business defaults on a standard loan, creditors can typically pursue only company-owned assets.
This powerful protection is the primary reason the LLC is one of the most popular structures for small businesses. Your personal assets remain shielded, allowing you to take calculated business risks without jeopardizing your personal security.
Contact Calabrese Law Associates for assistance with challenging LLC liability issues in the Greater Boston Area and beyond.
4 Scenarios Where You Are Personally Liable
The legal process a court uses to bypass the liability shield and access an owner’s personal assets is known as “piercing the corporate veil.” This action occurs when an owner fails to maintain the genuine separation between themselves and the business. Here are five common scenarios that can lead to a loss of LLC and personal liability protection.
1. You Sign a Personal Guarantee
When applying for a business loan or commercial lease, it is standard practice for lenders to require you to sign a personal guarantee. By signing, you agree to serve as the financial backstop if the LLC is unable to pay the debt. The LLC shield does not apply to debts for which you have personally accepted contractual liability.
2. You Commingle Personal and Business Funds
If you use business accounts to pay your personal expenses or commingle personally obtained money with business funds, a court can conclude the LLC is not a separate legal entity and may pierce the veil to settle business debts from your personal accounts.
3. You Commit Fraud or a Personal Wrongful Act
If you personally commit a fraudulent act, cause an injury through your own negligence, or make a deliberately false statement, you can be held personally liable. For example, if a contractor knowingly and falsely underbids a job to win a contract, that act of fraud can create personal liability in the LLC, even if the contract was with the LLC.
4. The Business Is Inadequately Capitalized
If an LLC is formed with so little money that it could never realistically meet its foreseeable obligations, a court may deem it a sham from the start. This action suggests the intent was not to build a legitimate business but to shift risk onto creditors, giving them grounds to pierce the veil.
A Properly Registered Business Entity Can Limit Some Personal Liability, but not all Liability
An LLC is helpful because it is specifically designed to separate business assets and expenses from your personal assets and expenses. If your LLC signs a contract with a vendor and fails to pay, the vendor’s dispute is with the LLC, not with you personally — unless you signed a personal guarantee.
In contrast, if you do not properly register and manage your business as a separate entity, such as an LLC or corporation, and instead conduct your business as a sole proprietor or a general partnership, you will be personally liable to fulfill all debts, losses and judgments against your business.
It’s important to note that, under Massachusetts law, individuals can be held liable for their own unlawful conduct, even when operating as an LLC. For example, if the owner of an LLC damages a customer’s property while performing a service they were hired to do, the individual could be sued for negligence.
Why Trust Us?
At Calabrese Law Associates, we provide industry-leading legal representation to clients in the competitive real estate and construction industries across the Greater Boston Area and throughout Massachusetts. Our firm delivers efficient and effective counsel for a reasonable fee.
We possess the deep industry knowledge our clients need to navigate complex issues like business liability, contracts, and litigation. Our attorneys are accessible and responsive, dedicated to helping you understand your legal standing and protect your assets so you can run your business with confidence.
Protect Your Assets With Calabrese Law Associates
If you are a business owner in Massachusetts with questions about your liability to your business, contact Calabrese Law Associates today. Our experienced business law attorneys can help you ensure your personal assets remain secure.
This publication and its contents are not to be construed as legal advice nor a recommendation to you as to how to proceed. Please consult with a local licensed attorney directly before taking any action that could have legal consequences. This publication and its content do not create an attorney-client relationship and are being provided for general informational purposes only.
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