There are legal benefits in operating your business through a corporation or a limited liability company (hereinafter “LLC”). If you have a corporation or an LLC and you enter into contracts in your representative capacity, you are often not personally liable for that obligation. For example, if you sign your office lease “Jim Jones, Member, ABC Realty, LLC”, your LLC is legally established, and sometime later the business does not work out and you decide to close it down and leave the premises before the lease term is up, generally the landlord cannot come back and make personal claims against you unless you have signed a personal guaranty of the lease. If the landlord does require a guaranty, your attorney may be able to negotiate a limited guaranty on your behalf.
If your company is corporation or LLC, it may also give you an advantage over a competitor who is not. For example, if your company provides services to customer on a regular basis, the customer may prefer you to be incorporated or be an LLC since the state is less likely to find your company to be an employee of the customer.
However, under New Hampshire law if your company is a corporation that is not paying its employees’ wages and you know about it and permit that to occur, you could also be also liable to the unpaid employee. If the company were an LLC it is less clear whether you would be liable to the unpaid employee but it is quite possible. In addition, New Hampshire’s discrimination law could subject you to personal liability for discrimination or retaliation even if you do the acts as a representative of the legal entity. For example, if an employee of your corporation or LLC comes to you and complains that he believes he is being racially discriminated against and you then fired him for performance issues, he may claim you fired him in retaliation for the discrimination claim. He can make that claim not only against the company, but also against you personally. Additionally, you can be held personally liable for your own negligence or intentional wrongful acts even though you do them as a representative of the company.
The foregoing is an example of why, in addition to often being prudent to incorporate or establish an LLC for your business, it is important to have a comprehensive discussion with your insurance agent as to what insurance coverage you should have. Most commercial liability policies exclude employment practice liability and therefore you need a separate additional endorsement on your insurance policy. Even if you have done nothing wrong, it could cost money to defend yourself and insurance can cover that cost.
You also must follow the rules of a corporation of LLC. Your failure to file annual returns with the New Hampshire Secretary of State’s Office and follow through with all the formalities of the entity such as for corporations; use the company’s account as your own personal checking account; or you taking excessive distributions so that the company cannot pay its creditors on time; all could result in personal liability of you. Also under state law, if you pay yourself back from the company monies legitimately owed to you and that payment leaves the company insolvent and unable to pay other creditors, one of those other creditors may be able to recoup from you personally the monies you had the company pay you back.
Lastly, to the extent you close down your company and open up a similar business under a new business name, there might be what is called “successor liability” of the new company for the old company’s debts.
In summary, incorporating or creating a LLC can be an important component of a successful business plan, but other components are: learning of the laws applicable to your business, including employment laws; and having a detailed discussion with your insurance agent to determine the various types of insurance coverage that are available so that you make an informed decision of what insurance coverage you should have for your business.
J. Daniel Marr is a Director and Shareholder at Hamblett & Kerrigan, P.A. His legal practice includes counseling businesses and individuals on a variety of legal issues and advocating on their behalf. Attorney Marr is licensed and practices in both New Hampshire and Massachusetts. Attorney Marr can be reached at [email protected].