In the construction business, as elsewhere, the days of sole proprietors acting in their own names are virtually gone. Most everyone today incorporates their business or forms a Limited Liability Company in the expectation that this will protect them from personal liability in the event of a lawsuit. But that expectation is not always borne out in practice.
For starters, a distinction must be drawn between contract liability and tort liability. A shareholder or member "acting as an agent of [an LLC], is ... protected from personal liability for making a contract where acting within his authority to bind the [LLC],” Mbahaba v. Morgan, 163 N.H. 561, 565 (2012). But there is no shield against liability for torts committed by the Company at the behest of whoever controls it. “When, however, a member or manager commits or participates in the commission of a tort, whether or not he acts on behalf of his LLC, he is liable to third persons injured thereby.” Id.
Even in the breach-of-contract setting, the veil of limited liability is not absolute. Courts “will pierce the veil and assess individual liability where the owners have used the company to promote an injustice or fraud upon the plaintiff.” Id. at 569. That can happen in a number of ways. For example, our Supreme Court has ruled that causing a Company to promise a payment out of an impending loan in order to avoid a mechanic’s lien, which the promisor had no intention of keeping, justified a finding of personal liability. LaMontagne Builders, Inc. v. Bowman Brook Purchase Group, 150 N.H. 270, 275 (2003).
While it is certainly true that “piercing the corporate veil is not permitted solely because a corporation is a one-man operation,” Village Press, Inc. v. Stephen Edward Co., Inc., 120 N.H. 469, 471 (1980), such operations do have a greater risk of rendering their owners personally liable. Without other shareholders or members to answer to, the temptation to treat the Company as the alter ego of the owner can be quite strong. Failure to observe corporate formalities and keep corporate and personal assets separate can result in veil piercing. "A lack of practical separation between the shareholder and the corporation, so that the corporation is merely the shareholder’s ‘alter-ego,’ is an important sign that the shareholder has abused the corporate form.” Laminate Sales, Inc. v. Matthews, 249 F.Supp.2d 130, 141 (D.N.H. 2003).
In addition, every Company must place some capital at risk commensurate with the contracts to be undertaken – and if the Company is too thinly capitalized, it may disable itself from meeting contractual obligations. This has resulted in veil-piercing in some settings, such as in the development of condominiums: “Setting up a corporation with insufficient assets or plan for assets to meet its expected debts and obligations under the condominium statute can justify the remedy of piercing the corporate veil.” Terren v. Butler, 134 N.H. 635, 641 (1991). In the construction setting there is often a time lag of a month or more between performance and payment, during which time payroll must be met, fuel and supplies must be purchased, etc. – and without a line of credit in some form, contractors can be at risk if they do not invest enough money to meet these interim contractual obligations while waiting for payment on a job.
To stay in good standing, a corporation or LLC must pay a modest annual fee and file annual reports with the Secretary of State. Failure to do so will eventually result in administrative dissolution of the Company. There is a statutory procedure for reinstatement after administrative dissolution, but any business conducted while the Company is dissolved will likely be deemed to be conducted by the owners personally, thus forfeiting limited liability.
Even if it otherwise exists, limited liability is lost by signing a personal guaranty. Most banks and supply houses insist on these as a condition of extending credit to a Company, and most bonding companies insist on them as a condition of issuing payment and/or performance bonds to the Company. There are good business reasons for those waivers. Don’t let bad business practices end up forfeiting your protection by operation of law.
For starters, a distinction must be drawn between contract liability and tort liability. A shareholder or member "acting as an agent of [an LLC], is ... protected from personal liability for making a contract where acting within his authority to bind the [LLC],” Mbahaba v. Morgan, 163 N.H. 561, 565 (2012). But there is no shield against liability for torts committed by the Company at the behest of whoever controls it. “When, however, a member or manager commits or participates in the commission of a tort, whether or not he acts on behalf of his LLC, he is liable to third persons injured thereby.” Id.
Even in the breach-of-contract setting, the veil of limited liability is not absolute. Courts “will pierce the veil and assess individual liability where the owners have used the company to promote an injustice or fraud upon the plaintiff.” Id. at 569. That can happen in a number of ways. For example, our Supreme Court has ruled that causing a Company to promise a payment out of an impending loan in order to avoid a mechanic’s lien, which the promisor had no intention of keeping, justified a finding of personal liability. LaMontagne Builders, Inc. v. Bowman Brook Purchase Group, 150 N.H. 270, 275 (2003).
While it is certainly true that “piercing the corporate veil is not permitted solely because a corporation is a one-man operation,” Village Press, Inc. v. Stephen Edward Co., Inc., 120 N.H. 469, 471 (1980), such operations do have a greater risk of rendering their owners personally liable. Without other shareholders or members to answer to, the temptation to treat the Company as the alter ego of the owner can be quite strong. Failure to observe corporate formalities and keep corporate and personal assets separate can result in veil piercing. "A lack of practical separation between the shareholder and the corporation, so that the corporation is merely the shareholder’s ‘alter-ego,’ is an important sign that the shareholder has abused the corporate form.” Laminate Sales, Inc. v. Matthews, 249 F.Supp.2d 130, 141 (D.N.H. 2003).
In addition, every Company must place some capital at risk commensurate with the contracts to be undertaken – and if the Company is too thinly capitalized, it may disable itself from meeting contractual obligations. This has resulted in veil-piercing in some settings, such as in the development of condominiums: “Setting up a corporation with insufficient assets or plan for assets to meet its expected debts and obligations under the condominium statute can justify the remedy of piercing the corporate veil.” Terren v. Butler, 134 N.H. 635, 641 (1991). In the construction setting there is often a time lag of a month or more between performance and payment, during which time payroll must be met, fuel and supplies must be purchased, etc. – and without a line of credit in some form, contractors can be at risk if they do not invest enough money to meet these interim contractual obligations while waiting for payment on a job.
To stay in good standing, a corporation or LLC must pay a modest annual fee and file annual reports with the Secretary of State. Failure to do so will eventually result in administrative dissolution of the Company. There is a statutory procedure for reinstatement after administrative dissolution, but any business conducted while the Company is dissolved will likely be deemed to be conducted by the owners personally, thus forfeiting limited liability.
Even if it otherwise exists, limited liability is lost by signing a personal guaranty. Most banks and supply houses insist on these as a condition of extending credit to a Company, and most bonding companies insist on them as a condition of issuing payment and/or performance bonds to the Company. There are good business reasons for those waivers. Don’t let bad business practices end up forfeiting your protection by operation of law.
RSS Feed