“U Can’t Touch This”

Sorry for the throwback but Hammer’s phrase immediately came to mind when I thought about the common myth business owners embrace that by forming a business entity they are fully protected from a lawsuit grab of their personal assets.  If only it were true.

The truth is that the most perennial disputes between employees and businesses – those involving allegations of discrimination, failure to pay overtime or minimum-wage, and failure to provide required family medical leaves – have what is called individual liability, which means business owners and their assets are on the hook should the employee prevail in a lawsuit.

First, let us get straight what immunities corporations and limited liability companies do provide.  The reason to form a corporation and/or a limited liability company is to put out of reach personal assets when it comes to breach of contract claims.  It is the company that is the party to a lease for premises or a vendor agreement for, say, a photocopy machine and not the individual owner or owners. If the company becomes unable to pay the rent or for ongoing payments for that photocopying machine, then it is the company that becomes liable for the arrears and not the business owner or owners.  Of course, in many circumstances where a company does not have a revenue track record or a credit history, a landlord or vendor may require an owner to be a guarantor of a lease or a finance agreement. If that is the case, then default on the lease or finance agreement will mean the guarantor (i.e., owner) will become responsible for payments. But if owners are not guarantors for any of the company’s agreements, then default with respect to any agreements will not be the responsibility of any of the owners, unless the owners do not respect the entity form by, for example, commingling personal and company assets and liabilities to the extent that there is no boundary between the realm of the personal and company, and in the process of the failure to respect the entity form they also defraud creditors.  Under a theory called piercing the corporate veil, a creditor can seek to collect a debt owed by the company through individual owners under the circumstances previously described. If owners respect the corporate form (i.e., refrain from commingling personal and company assets and liabilities and do not drain company assets with the express purpose of frustrating creditors, i.e. do not commit fraud), then liability arising from contractual agreements like leases and financing agreements will not become the responsibility of individual owners. 

That being said there are still lawsuits that are brought against companies that raise the specter of individual liability against business owners.  They are discrimination claims under the Connecticut Fair Employment Practices Act where the owner is alleged to have aided and abetted the discriminatory conduct (note that there is no individual liability under the primary federal discrimination statute, i.e., Title VII).  Under the Fair Labor Standards Act, an individual found to be an employer (i.e., an owner who has daily operations responsibilities and/or a supervisor who has the power to hire, fire, schedule and set payment rates) is liable for any compensation owed. Under the federal Family Medical Leave Act, an individual found to be an employer (using the same framework for finding someone to be an employer under the Fair Labor Standards Act) is liable for damages flowing from a violation.  There are other state and federal statutes where individual liability can be found but the foregoing are the most highly trafficked and pose the greatest exposure to liability.

So – owners beware.  Immunity is not guaranteed by forming a corporation or limited liability company.  In order to avoid individual liability under any of the discrimination, wage and hour and family leave statutes, you should consult with an attorney who can perform an audit to confirm that your company’s policies and practices conform to relevant law.

Disclaimer:  Edgar Law LLC provides this information as a service to clients and other friends for educational purposes only.  It should not be construed or relied on as legal advice or to create a lawyer-client relationship. Attorney Advertising.