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.