Vail Daily column: Limited liability company is a ‘protective’ structure
There are true and palpable advantages to conducting a commercial enterprise as a corporation, limited liability company or other similar “protective” structure.
First, though, what exactly does “limited liability” mean? Well, what it doesn’t mean — not surprisingly — is “no” liability. It’s kind of interesting how often people get that wrong. “Limited” just ain’t the same as a Mulligan. It just means, “limited” or “”less than.”
What limited liability goes to is the concept of “vicarious liability.”
Some ’splainin’ is in order.
“Vicarious” means “indirect.” Accordingly, “vicarious liability” means indirect legal responsibility. For example, an employer may be vicariously liable for the acts of her employee. Let’s say, I’m driving a Wonder Bread truck for Flowers Foods. In so doing — oops, I shoulda been watchin’ the road instead of texting — I take out the corner of the 7-11 I was supposed to be supplying with fluffy white bread. While Flowers Food may not be exactly happy with my performance behind the wheel, it may very well be vicariously liable for my careless act.
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But let’s back up just a mite. What then is “liability?”
“Liability” is a broad term but, at its essence, may be defined as being legally responsible. If I punch you in the schnoz (although at the moment, I can think of no good reason to do so), I just might find myself paying for your rhinoplasty. My actions created your misery and, as such, I may be forking out to make it right. My punch to your nose cracked your septum like a walnut and I, accordingly, have the legal obligation to restore your nares to their former glory.
Protecting your wallet
So, besides having the impressive, “Inc” or “LLC” behind the name of your company, one of the things that being an entity of limited liability does, is limit one’s vicarious liability. It kind of puts a leash on for what one might otherwise be responsible. What else an entity of legal liability does — in most circumstances anyway — is prevent an injured party from getting into your wallet.
Back to the wandering Wonder Bread truck.
Let’s say, in taking out the corner of the 7-11, I have caused a zillion dollars in damage. Let’s say, too, that Flowers Foods has something short of a zillion dollars to satisfy a judgment. Simplifying this a whole bunch, if 7-11 tries to go after the Flowers’ shareholders’ bank accounts to make up the deficiency, like a good defenseman in a hockey game, the limited liability structure will be a cross check to keep 7-11 from so doing. Liability is limited to the entity and, except in unusual cases and with some truly impressive gymnastics, 7-11 will not be able to get to the officers, directors or investors to satisfy its claim.
It may be helpful to understand too, that an entity of legal liability is, under the law, a separate legal being. Yep, in the strange world of law, Coca-Cola is the near equivalent of Angelina Jolie. Hmmm. That was affirmed with a punctuation mark in the 2010 United States Supreme Court case of Citizens United vs. Federal Election Commission, which held that corporations (and other similar entities) have certain “people-like” rights. Admittedly, I have strayed a little far afield. So back to corporations …
What then do I mean by an “entity of limited liability”? Well, it’s sort of like animals in the zoo. Some corporations are well known, like zebras for example. Some are a little more exotic; let’s stretch and say, just as most people have heard of a lemur, most have at least passing acquaintance with a limited liability company. And some are downright odd; ever heard of a Mwanza flat-headed agama lizard or a FLLLP (a Family Limited Liability Limited Partnership)? Nah, I didn’t think so. What these entities all have in common — like what animals in the zoo have in common is being animals — is that they are all recognized legal structures by which one can “contain,” control and “encapsulate” potential liabilities.
If you have assets separate from the entity that you want to protect, a good way to do so is by forming and maintaining an entity of limited liability. In the event the worst happens, in most circumstances the limit of the entity’s liability will be what “it” owns rather than what you own. What’s more, in most instances at least, you will not be vicariously liable for the acts and obligations of the entity. If I drive my Wonder Bread truck into the 7-11, 7-11 will not be able to reach into the pockets of the Flowers Foods shareholders.
I should say, there are many different “flavors” of limited liability entities. Besides the zebras and lemurs (corporations and limited liability companies), there are, among others, limited partnerships, limited liability limited partnerships, limited partnership associations and others. Which one is the best fit for you is best left to you and your legal advisor.
As you’ve no doubt heard, “a fool and his money are soon parted.” That said, a way to not be a fool when doing business is to form an entity that suits you and, as we say in law, “CYA” (covers your assets).
Rohn K. Robbins is an attorney licensed before the bars of Colorado and California who practices in the Vail Valley with the law firm of Stevens, Littman, Biddision, Tharp and Weinberg LLC. His practice areas include business and commercial transactions, real estate and development, family law, custody, divorce and civil litigation. He may be heard on Wednesdays at 7 p.m. on KZYR radio (97.7 FM) and seen on ECOTV 18 as host of “Community Focus.” Robbins may be reached at 970-926-4461 or at either of his email addresses, email@example.com or firstname.lastname@example.org.