What Happens if There is a Claim Against One of Your Business’s Executives?

A major business concern is having an adequate executive protection plan in place. Owners worry that if an executive makes a mistake, they could lose both their business and personal assets. If the business lacks the protection needed to settle a debt, it could result in financial devastation. Oftentimes, with a limited liability company (LLC), the owner may not be personally liable for the business’ obligations. However, there are some situations where the owner of an LLC can be sued personally for their own actions.

Filing as an LLC 

To qualify as an LLC, the business owner must file specific documents with the state. If the state grants the business LLC status, it becomes a separate legal entity from the owners, therefore in any lawsuit the business may be named as a defendant. The owners can work for the LLC and receive a distribution of funds from the business. Typically, an LLC has less managerial protocols than a corporation, protecting owners from being personally liable for its obligations.

Understand Court Functions

If the LLC acts as a “veil” protecting the LLC’s owners from the business’s liabilities, a judge still has the ability to “pierce the veil” and allow an owner to be named as a party to a lawsuit in certain circumstances. This will occur when the LLC is being used illegally or if there is no true distinction between the owners and the LLC. 

For example, if you commit fraud while acting as an officer for the LLC and then seek to use the liability shield to protect yourself from being personally liable,  it is not likely a court will permit that. This issue also arises if the owner interacts with an individual on behalf of the LLC without clarifying that to the third party; if the third party brings suit relations to that interaction, the owner can be named as a defendant.

An owner can also be sued personally for a business obligation if they personally cosign a business loan, since the owner would share liability for paying off debt and could be named as a defendant by the lender to obtain what is owed. This is why an executive protection plan is so important. 

Protection 

There are a few things that can be done in an effort to avoid being sued for the LLC’s actions. First and foremost, do not participate in any fraud or illegal activity. It’s also prudent to be completely clear when acting on the LLC’s behalf by referencing the business numerous times during any communication with a third party. In terms of financials, the business and its owners should maintain separate accounts and records, never crossing funds. If there are any distributions from the business to the owner, it should be clearly recorded in both the LLC’s and owners’ personal records. Additionally, when organizing the LLC, ensure that the business is properly capitalized, meaning that the LLC’s assets and income are sufficient to pay expected debts and obligations. Be prepared with an executive protection plan. 

About Moody Insurance Worldwide

Moody Insurance Worldwide, a division of Moody & Associates that was founded in 1914, is a leading provider of risk management programs and insurance coverage to individuals and businesses across the East Coast. We write all sizes of businesses, with technical expertise in many key industry areas, and provide personal insurance programs for estates and high net worth individuals. Our licensed, experienced commercial account managers can work with you to determine the coverage that you need at a competitive rate. Contact us today at (855) 868-0170 to learn more about what we can do for you.