When are Owners of a Business Entity personally liable?

Generally, individuals are responsible for their own conduct. The rules of agency may make an individual vicariously responsible for the acts of an agent, if that agent is acting with authority or within the scope of her employment.

What is Limited Personal Liability?

Some business entities limit the liability of business owners for the actions of agents of the business. This means that the owner is protected from being held personally liable for the debts (contracts) or tortious conduct of the business employees or other owners. That is, the business owner does not risk losing her personal assets for debts created or tortious activity committed by the business or its owners. This business entity characteristic is a strong motivation for individuals to form a business entity to carry on their business activities.

• Note: It is important to remember that a business entity offering personal liability protection to its owners may forfeit that protection if the Secretary of States office or the court disregards the business entity. The Secretary of State may dissolve a business entity for failing to follow entity maintenance requirements. More commonly, a plaintiff who is suing the business may attack the business entity status in an attempt to pierce the veil. Piercing the veil is discussed further in the corporate governance chapter.
• Example: The owner of an LLC has two employees who deliver goods to customers. One of the employees accidentally crashes the company vehicle into a pedestrian. The pedestrian can sue the negligent driver and the LLC for damages. The driver may be personally liable for his negligent driving. The LLC may be vicariously liable for the employees tortious act, since it was committed when the employee was acting in furtherance of the business operations. The owners personal assets, however, may be protected from the reach of the plaintiff.