Friday, 20 March 2015

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.

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