Cunningham on LLCs: Liability Shields

If you are a member or manager of a New Hampshire limited liability company or plan to form a New Hampshire LLC, you and your business advisors need to have a basic understanding of LLC law and taxation to be successful. This is the first in a series of columns in this journal that will provide you with this knowledge.

New Hampshire LLC Liability Shield

Your LLC has many important legal characteristics under New Hampshire LLC law. But the two most important are:

• Your LLC gives you a key type of asset protection that lawyers call a legal liability shield.
• Your LLC gives you charging order protections (a complex but powerful LLC asset protection method that I’ll discuss in the next column).

Here’s what you need to know about your Liability Shield:

• LLCs carry this name not because they have liability protection, but because they give you one.
• If a third party sues you as a member or manager of your LLC – for negligence or breach of contract – just because you are a member or manager, your LLC’s liability shield bars state or federal courts. From transferring your personal assets – such as your home, money in your bank accounts, your car or investments – to the claimant. Other important types of New Hampshire business entities — such as general partnerships — do not provide this protection, and you should not conduct business without this protection.

However, your liability shield will not protect you if the claimant’s LLC asserts that the injury was caused by your own personal wrongdoing — such as negligence — and the claimant asserts that claim.

• Additionally, under a court doctrine known as “piercing the veil,” your LLC’s liability shield does not protect you if the claimant, as a member or manager of your LLC, proves that you used it for serious misconduct—for example, fraud or embezzlement.

Liability insurance is great, but liability insurance is even better. You should obtain the maximum liability insurance available that is appropriate for your LLC business.

• A multi-member LLC’s liability shield is better than a single-member LLC. Should your spouse or other trustee be a minority member of your LLC?

It is true that liability shields are not only available to owners of New Hampshire LLCs, but also to owners of all other major New Hampshire non-LLC entities. These include shareholders of business corporations, limited partners of limited partnerships, and owners of all registered New Hampshire limited partnerships and registered general partnerships.

This raises a key LLC legal question: Which of the above New Hampshire business entity types provides the strongest liability shield?

The answer is that the liability shield for other non-corporate entity owners is just as strong as the LLC’s liability shield. However, all these liability protections are stronger than the corporate shield.

This is because if corporate shareholders and their directors and officers fail to comply with a number of well-known “corporate formalities” such as the maintenance of certain books, the shareholders themselves may be held personally liable for damages caused to third parties by their corporation. Such formalities do not apply to LLCs (or, for that matter, to any other non-corporate entity).

However, LLCs have other key legal features that make them better than other New Hampshire non-corporate business entities for most New Hampshire business owners.

Practice the tips

Here are some key tips to take away from the above discussion.

• Don’t expect the LLC’s liability shield to protect you if you commit personal wrongdoing on behalf of your LLC. This is the main reason why you should maximize LLC liability insurance.
• Make sure you take all necessary steps to avoid curtain piercing. (I’ll discuss these steps in an upcoming column.)
• If you run your business as a business corporation and have significant personal assets, consider converting your corporation to an LLC. New Hampshire law makes these conversions simple.

John Cunningham, an attorney licensed to practice law in New Hampshire and Massachusetts, is of counsel at McLane Middleton Law Firm. They can be reached at 603-856-7172, lawjmc@comcast.net or llc199a.com.