Shareholders and Lost Limited Liability

Shareholders and Lost Limited Liability

 
Many of your clients may be engaging in behavior that puts their limited liability as owners of a business at risk. Having decided to form a corporation or a limited liability company for their business, many people then engage in risky behavior. There are, however, several areas where you can help your clients protect their personal resources from corporate liability.
 
Professor Carey writes: If you ask most people what they think the greatest inventions of all time are, limited liability through the corporate form of business organization is unlikely to make the list. The telephone, television, airplane, printing press, computer, internet, combustion engine and light bulb are all much more likely to come to people's minds. But many commentators have argued that there should be room on the list of great inventions for limited liability. Many claim that limited liability was a critical component in creating the industrial and technological revolutions of the last hundred-plus years.

Regardless of whether most people would put limited liability on their list of great inventions, millions of people each year seek out the benefits of limited liability by forming new companies. These people are starting or continuing business ventures many of which would not be possible or practical if all of the owners had unlimited liability. By being able to limit the owners' exposure to the amount they invested, companies are able to raise capital that they otherwise simply could not otherwise obtain. If every investment brought with it he risk of losing our house, car and retirement savings, most corporate investment would simply cease. Limited liability is an amazing engine for economic growth upon which a great many of your clients are undoubtedly relying.

Unfortunately, many of your clients may be engaging in behavior that puts their limited liability at risk. While there may be an argument that corporations and limited liability companies should be treated differently when evaluating whether limited liability should apply, the safest course of action is to assume that limited liability companies will be evaluated similarly to how corporations have been reviewed over the last two hundred years. This commentary will reference shareholders, but you should understand its advise to apply to members of limit liability companies as well.
 
 
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