Get something in writing

If you are going to do business it is very important to have something in writing.  Ideally the parties have a formal contract that is signed by all involved.  Ideally it sets forth all the terms and conditions and is intended as the final written expression of the parties’ agreement.  And, ideally, it is not ambiguous, meaning it is not susceptible to different interpretations.

But sometimes doing business gets ahead of the contracts.  Things are going well.  Everyone seems to be acting in good faith.  So things are done on a handshake.  Or maybe there is some exchange of email or just a confirming email.  Sometimes these kinds of writings will create a written agreement.  Sometimes they provide evidence of the terms of what is an oral agreement. 

Or in some businesses the transactions are documented through purchase orders and invoices.  And the fine print at the bottom or on the back can make an important difference in how things will go down if things do not work out.

Generally speaking some form of writing is better than none.  And more writings are probably better.

That said, beware of forms you may find on the internet or what might be generated by a computer form program.  Having a writing may save you from some problems, but using any old writing may also create other problems.  This is because boilerplate or “standard” terms picked from different deals may have little or nothing to do with your deal.  Or those terms may contradict what you are trying to accomplish.  And the more ambiguity and conflicts there are in a writing the more room there is for competing interpretations and disputes.

There is an old saying about getting what you pay for. 

There is a well known phenomenon of people trying to diagnose medical problems through internet research. 

So run your agreement by your attorney to see if it will do what you want it to do.

The same kinds of things can easily come into play with home made contract documents copied and pasted from the internet.  It is easy to create conflicting provisions.  Terms and conditions lifted from one situation may make little sense when injected into another setting.  Or the deal may be structured incorrectly through a misunderstanding of legal concepts.

What are other possible ways around the limited liability of an entity aside from the alter-ego doctrine?

The point of legal entities is to shelter the owners from liability for the debts or liabilities of the legal entity.  This encourages risk taking.  The owners’ capital and investment is at risk. But they are not generally liable for all the debts of the entity in case things do not work out.

If the owners run the entity in an abusive fashion such that it is not really a separate person as an entity should be (there are about fifteen different factors to look at and it is a fact specific analysis), then the owners may lose the privilege of limited liability.

Aside from alter-ego liability, other companies or individuals may have liability for the obligations of an entity.  An incomplete summary includes some of the following. 

There is a body of law dealing with fraudulent transfers.  These can be transfers or transactions entered into with the actual intent of hindering, delaying or defrauding creditors.  A classic example outside of the corporate realm is selling your house to a relative for a dollar and you still get to live there.  Other transfers may be deemed fraudulent as to creditors even if there is no intent to hinder, delay or defraud a creditor.  If a transfer renders a person or entity insolvent or leaves them with insufficient assets for a transaction or venture, that is practically the same thing.

And if there is a fraudulent transfer then the transfer may be set aside.  Or the recipient of the money or property may wind up with a judgment against them also.

Another thing to consider when one has a claim against an entity is that there may be other players who have personal liability for a transaction or what went down in a transaction.

As discussed elsewhere, the point of most legal entities is to shelter the owners from liability for the debts or liabilities of the legal entity.  This encourages risk taking.  The owners’ capital and investment is at risk. But they are not generally liable for all the debts of the entity in case things do not work out.

However individuals working at or for the entity may have personal liability for their own acts.  This probably would not come up in a straightforward contract situation.  Two businesses sign a contract.  The agreement probably spells out who the parties are – probably the corporate entities.  The people signing the agreement probably are not taking on personal liability provided they are signing in a representative capacity, i.e. someone is signing as an officer or agent of one of the entities. 

Of course people can give a personal guarantee.  But that will need some language showing that is part of agreement.

However a person involved in a transaction may have their own personal liability for fraud or misrepresentation.  If there is fraud then the aggrieved party can go after the entity as well as those who acted for the entity in making the false representation.

Other situations also can give rise to direct claims against individuals.  These might include claims for bodily injuries if there were an accident or an intentional battery.  Harassment will fall into this category as well.

So while it is important to recognize the limited liability provided by legal entities, do not forget to consider that there may be ways to get around that. 

Who is your customer and is there limited liability

When you are doing business it is very important to understand who your customer is. This has nothing to do with understanding your customer's needs, challenges, issues, or requirements. Instead it is all about knowing with whom, exactly, you are dealing.

Is your customer a corporation? Is it a limited liability company? Is it some other form of entity? Is it a partnership? Is it a sole proprietor?  May be there is a trade name that does not readily reveal who or what might be behind it.

This question about identity is very important in case there is a problem or you need to enforce an agreement.

This is important because many forms of legal entities carry with them limited liability. Legal entities exist to shelter the owners and investors from risk. This is often a good thing because it encourages people to start new ventures and try new businesses. The investment of the owners is at risk, but the point of limited liability is that the owners are not putting all of their personal assets on the line.

The flip side of limited liability is that people or businesses who are dealing with the entity may have a collection problem.

Don’t guess who you are dealing with.  Find out who your customer is and if they are a limited liability form of entity such as a corporation or a limited liability company.  If there is a trade name you need to find out who or what is behind it. 

Once you know who your customer is you can evaluate the risk of dealing with them, set a credit limit, obtain guarantees, or take other action to protect your rights.  Don’t wait until there is a problem to figure out who you might have a claim against.

Just because there is an entity on the other side of a deal does not mean all is lost in case things do not work out.  Depending on the nature of the legal claims and what happened, a creditor may have claims against officers, directors, employees or shareholders.

One common route around the limited liability of an entity is called the alter-ego doctrine. 

Legal entities are supposed to be people separate and distinct from the people who own them.  A legal entity may own property and should have its own bank accounts.  An owner may lose the privilege of limited liability if they fail to treat the entity as a separate and distinct person.  Hence the label “alter-ego”. 

An alter-ego liability case is always fact specific.  There are about fifteen factors a court will consider in determining whether or not the limitation on liability should be upheld.  And each owner is considered separately.  So a bad acting owner may be held personally liable for an entity’s debts where another owner who acts better may not be liable for them.  It all depends on the specifics of the case.

Since an alter-ego claim is another layer of complexity to get past in a court case, it is better to know about and plan for these kinds of issues at the beginning.