A primary reason that many people who own their own business set up a limited liability company, corporation or other formal business entity instead of operating as a sole proprietorship or a partnership is liability protection – to protect their personal assets from claims against their business.
This liability protection should not be thought of as an absolute shield. Rather, it is a “corporate veil” and it is capable of being penetrated. If a plaintiff is able to convince a court that it is appropriate to “pierce the corporate veil,” then the plaintiff can go after a business owner individually. The burden of proof is on the plaintiff to convince a court this is appropriate.
A significant factor that courts look at when deciding whether to allow a plaintiff to pierce the corporate veil is whether the plaintiff knew or reasonably should have known that the company was a business entity. If not, a court may use that as a basis to hold the individual owner liable. The basic logic is that if the plaintiff in doing business with the company thought that it was doing business with the individual and relied on that representation (or lack thereof to the contrary), then the individual should be held responsible also.
The risks of piercing can thus be minimized by establishing an operational connection between your company name (including the “LLC” or “Inc.”) and the business that you are doing. For instance, you should have your business entity name on every contract you enter into, your advertising, your business card, the side of your company vehicle, etc. You don’t necessarily need to have the full name spelled out in full every time it is referenced, but you should put it forth in an obvious and conspicuous manner.
It is especially important to be mindful of creating an operational connection if you have one business entity that has separate divisions with DBA names. Let’s say your business name is “Great Lakes Advertising, LLC” and you use the DBA of “Great Lakes Social Media Gurus.” When you present your company, it is critical that you let people know you are “Great Lakes Advertising, LLC” even if you primarily present yourself as “Great Lakes Social Media Gurus.”
There are other ways to minimize the risk of piercing. Whether you are just starting your business or years into operations, it is worth your time to consult with an attorney about how you operate and whether your processes could be improved to provide you with better protection.