Cunningham on LLCs: liability shields
LLCs have several key characteristics that make them a better kind of business entity for most owners
If you are a member or manager of a New Hampshire limited liability company, or if you plan to form a New Hampshire LLC, you and your business advisers need to have a solid basic knowledge of LLC law and tax in order to be successful. This is a first in 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 lawyers call a statutory liability shield.
- Your LLC provides you with charging order protections (a complex but powerful form of LLC asset protection that I’ll discuss in my next column).
Here’s what you should know about your liability shield:
- LLCs have that name not because they have liability shields but because they give you one.
- If a third party ever sues you as a member or manager of your LLC—say, for negligence or a contract breach — simply because you are a member or manager, your LLC liability shield will very probably prevent the courts, whether state or federal, from transferring your personal assets — e.g., your home, the cash in your bank accounts, your car, or your investments—to the claimant. Other important types of New Hampshire business entities — e.g., general partnerships—don’t provide this protection, and you shouldn’t conduct a business without this protection.
However, if a claimant alleges that the harm your LLC has caused it is the result of your own personal misconduct — e.g., negligence — your liability shield won’t protect you if the claimant proves this claim.
- In addition, under a court doctrine called “veil piercing,” your LLC liability shield won’t protect you if a claimant proves that, as a member or manager of your LLC, you’ve used it to engage in serious misconduct—e.g., fraud or embezzlement.
Liability shields are great, but liability insurance is better. You should obtain the maximum available liability insurance appropriate for your LLC’s business.
- The liability shield of a multi-member LLC is better than 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 owners of New Hampshire LLCs but also to owners of all of the other main kinds of New Hampshire non-LLC entities. These include shareholders of business corporations, limited partners of limited partnerships, and all of the owners of registered New Hampshire limited partnerships and registered general partnerships.
This gives rise to a key LLC legal question: Which of the above types of New Hampshire business entities provides the strongest liability shield?
The answer is that the liability shield provided to owners of other non-corporate entities is just as strong as the LLC liability shield. However, all of these liability shields are stronger than the corporate shield.
This is because if corporate shareholders and their directors and officers fail to comply with any of several classic “corporate formalities,” such as the maintenance of minute books, the shareholders themselves may be personally liable for harm caused to third parties by their corporations. No such formalities apply to LLCs (or, for that matter, to any other non-corporate entities).
However, LLCs have other key legal characteristics that make them, for most New Hampshire business owners, better than the other main kinds of New Hampshire non-corporate business entities
Here are the main practice tips you should derive from the above discussion:
- Don’t expect your LLC liability shield to protect you if, acting on behalf of your LLC, you engage in personal misconduct. This is a major reason why you should maximize your LLC liability insurance.
- Be sure to take all necessary steps to avoid veil piercing. (I’ll discuss these steps in a forthcoming column.)
- If you conduct your business as a business corporation and you own substantial personal assets, you should consider converting your corporation to an LLC. New Hampshire law makes these conversions easy.
John Cunningham, a lawyer licensed to practice law in New Hampshire and Massachusetts, is of counsel to the law firm of McLane Middleton. He can be contacted at 603-856-7172, firstname.lastname@example.org or llc199a.com.