Farm Progress

Country Counsel: When transacting business with an LLC, consider doing some background research on the company.

Robert Moore, Co-owner

November 9, 2018

4 Min Read
PROTECT YOURSELF: One way to protect yourself in a business arrangement with an LLC is to consider requiring the owners to guarantee the contract personally.Pattanaphong Khuankaew/Getty Images

It is fairly common knowledge that LLCs can provide liability protection to the owners, and establishing an LLC is often a good business strategy. Generally, LLCs prevent the owners from being personally liable for the actions of the LLC. The idea behind LLCs is that if LLC laws give the owners liability protection, more people are likely to start and operate business — which tends to be good for society. But like just about everything, there are negative consequences of LLC liability protection.

When you do business with someone, do you look to see if he or she is an LLC, corporation, partnership or sole proprietorship? You probably do not, but there are implications to the business structure. Doing business with an LLC (or corporation) can have significant implications to you if the transaction goes bad.

As stated previously, an LLC prevents the owners from being personally liable for the actions of the LLC.

LLCs protect their owners from liability
This liability protection is for tort claims (injuries to people or property) and financial liability. The financial liability protection is what affects you when you do business with an LLC. If your business dealings with the LLC go bad, you have recourse only against the LLC and not against the owners.

Consider the following example: A farmer agrees to feed out hogs for a new startup, Hog World LLC, owned by Andy and Bob. Farmer and the LLC enter into a contract whereby Farmer will feed and care for Hog World’s pigs and will be paid one lump sum after the hogs have been hauled to the processor. After one batch of pigs, Farmer’s payment is late. Farmer finds out Hog World LLC has made some bad business decisions, is out of business and has no money to pay him. 

Hog World LLC is in breach of contract because it has not paid Farmer. Farmer can file a lawsuit against the LLC and will likely prevail. However, Hog World LLC has no money or assets to be paid from, even if the lawsuit prevails. Because Hog World is an LLC, Andy and Bob have no personal liability for the contract. Andy and Bob could be very wealthy and have plenty of their own money to pay Farmer, but they are not legally obligated to do so because Farmer was in contract with the LLC, not Andy and Bob personally.

When transacting business with an LLC, consider doing some background research on the company. One of the primary things to look at is what assets are in the LLC. Is it just a shell company that really does not own any assets, or is it a well-established business with substantial assets? Be especially careful when dealing with new businesses, as they are less likely to have significant capital investment.

How to protect yourself
What can you do to protect yourself in a situation such as the above example? Consider requiring the owners to personally guarantee the contract. If Farmer would have required Andy and Bob to guarantee the performance of the hog contract personally, Farmer could have also sued Andy and Bob and would likely have gotten paid. Lenders will often require the owners of an LLC to guarantee the loan, so that if the LLC does not pay the debt, the owners are still personally liable for payments. Personal guarantees circumvent the financial liability protection LLCs provide to its owners.

Not every transaction with an LLC needs to be scrutinized with demands for personal guarantees. If you enter into a contract or other transaction with a well-established company with a good reputation and obvious substantial assets, you likely do not need to worry about collecting a debt. Most LLCs will never cause any problems for you. However, if you are entering into a business transaction with a newer, lesser-known LLC, it may be worth your time to do some due diligence first. This article only discusses LLCs; however, dealing with corporations have many of the same issues.

Contact Moore, an attorney at law, via email at [email protected]; cellphone, 614-648-8728; office, 740-990-0751; fax, 740-417-4411; mail, 92 N. Sandusky St., Suite 300, Delaware, OH 43015; or online at ohiofarmlaw.com.

 

 

 

 

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