Everyone has heard that the protection of an entity can shield the owners from personal liability. Legal entities such as LLC have the stigma that such a business cannot be sued. That generally is true, with exception.
But, failure to follow formalities associated with the entity can expose the owner to liability.
While corporations have many formalities… annual reports and directors’ meetings and minutes, an attractive feature of LLCs is fewer formalities. Yet, plaintiffs argue that co-mingling funds, for example, exposes the owners of the company to liability for the company’s alleged wrongs.
An example of current practice in Arizona
As an example, Sam and Sue own an entity called Restaurant LLC. Restaurant LLC operates a local restaurant and rents space to do the same.
A customer slip and falls while dining at their restaurant, causing a broken hip. The customer through an attorney sues Restaurant LLC and also names Sam and Sue personally on the lawsuit.
The plaintiff will have to show Sam and Sue failed to follow the formalities required to maintain protection of their entity.
In response, Sam and Sue will respond by showing that they maintain business records and a separate bank account, as examples.
Even if they can overcome the personal lawsuit, it’s a frustrating and invasive process. Luckily, the new Arizona Limited Liability Act protects greater protection for LLC owners.
What’s changed in Arizona for legal protections of liability
The new Act went into effect on September 1, 2019 for entities formed after that date. Starting September 1, 2020, it will apply to LLCs, regardless of formation date.
The new law means more protection for these entities
The new law provides that members and managers of LLCs are not personally liable for the entity’s debt or liability.
The new law also specifically states that failure to observe formalities is not grounds to impose liability. This is a significant addition and change, to the benefit of members.
As lawyers who represent business owners, we ensure active lawsuits that name individuals based on the prior law are disposed of. As many plaintiffs and lawyers are not familiar with or maybe just ignoring the new laws, we also ensure future lawsuits comply accordingly.
Encouraging new business should not mean personal liability
Our country favors people taking risks and starting businesses, which would be deterred if personal assets were on the line for liability.
Though this is a good change for business owners, there are many changes to the new law that may adversely impact the expectations of business owners.
How to seek help with business operating agreements and terms
Our firm addresses these concerns by drafting operating agreements which allow owners to make their own agreements and terms.
If you’re an LLC owner, it’s a worthwhile investment of your time to talk to us about the new laws and whether you’re protected.