Wednesday, April 14, 2010

Avoid Personal Liability: Always Use Legal Name of Business

In Virginia, a business entity properly registered with the State Corporation Commission (“SCC”) is a legal entity, separate and independent of its owners. Accordingly, unless it is necessary to promote justice, a business owner cannot be held responsible for the obligations of his/her business.

Nevertheless, business owners can quickly lose this shield of protection if they fail to disclose to third parties with whom they do business that they are acting in the capacity of an agent for the business, and not in their individual capacity. If this agency relationship is not disclosed (i.e third parties do not know they are doing business with an entity as opposed to an individual), the business owner may be held personally responsible for the obligations of the entity.

The same situation applies for business entities that use tradenames. If the tradename is not properly registered with the SCC, and the actual legal name of the entity is not disclosed to third parties, the business owner can be held personally responsible for the obligations of the entity.

Accordingly, it is very important for a business owner to make sure that all business correspondence (including letters, e-mails, contracts, agreements, business cards, etc.) clearly states the full legal name of the business. The full legal name includes the acronym identifying the form of the business entity (i.e. “Inc.”, “LLC”, “PC”, “LP”, etc.). When signing for the business, owners should always designate their title next to their name (i.e. President, CEO, etc. ) or use the term “authorized agent”. If a tradename is being used by the business, then it must be properly registered with the SCC. If not, all business correspondence must clearly state the actual legal name of the business, and not just the tradename.

Gross & Romanck, P.C. is currently representing an individual business owner being sued by a vendor for a debt of his business. The business had placed a purchase order with the vendor for expensive industrial machinery. When the business failed to pay for the machinery in full, the vendor sued the owner in his personal capacity for the debt. The vendor is relying upon the fact that the purchase order does not disclose the legal name of the business to argue that the order was placed by the owner, and not his business.

The lawsuit could have been avoided if the purchase order clearly identified the full legal name of the business or if the tradename had been properly filed with the SCC.

Do not let this happen to you! Always make sure that the full legal name of your business entity is disclosed to the third parties with whom your entity does business; and make sure that you always sign as an agent of the business.