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Cunningham On LLCs: Liability Shields – Shareholders



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Originally published by New Hampshire Business
Review

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

Practice tips

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 M. Cunningham Of Counsel, Corporate Department

The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.

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