January - Limited Liability Entities

Limited Liability Entities

            The first program of the new year dealt with limited liability entities.  

            I first emphasized that, contrary to common belief, these entities - - including corporations, limited liability companies, limited partnership, and limited liability partnerships, among others - - do not confer complete immunity from personal liability for their owners, officers, directors, or other principals. One obvious exception to such immunity is the long-established principle of personal liability for one’s own acts of negligence or other tortious conduct. Thus, in Indiana, even the ordinary nonboard members of a nonprofit corporation may become personally liable for their actions on behalf of such a corporation, and this is also true for the members, employees, or other agents of a limited liability company. (In Illinois, by contrast, ordinary members of not-for-profit corporations are immune for the liabilities of such corporations, and board members or officers who serve without compensation may only be liable for their acts or omissions involving “willful or wanton conduct” if the corporations are tax-exempt under I.R.C. Section 501 (c). However, the potential personal liability of the owners, officers, directors, or other principals of for-profit Illinois business entities are the same as for those formed in Indiana.)

            Other less obvious exceptions to immunity include, especially when they occur together, the inadequate capitalization of the entity in question, the failure to follow the proper forms of actions by the entity as opposed to the persons owning or running it, and the commingling of entity and personal funds. In general, if the owners or operators of a limited liability entity do not bother to treat it as separate from themselves before a liability of that entity arises, then its liability may well attach to them even apart from their unavoidable liability for their own wrongful actions.

            With this said, limited liability entities are invaluably protective against general business debts unless they are personally guaranteed and against almost all sorts of liability for the actions or omissions of others (so-called “vicarious” liability). They are so relatively easy and inexpensive to form and operate in Indiana that it is sad to think of all the people who do not take advantage of them but, instead, engage in business ventures individually as “sole proprietors” or, far worse, general partners.

            After touching on certain technical reasons why Indiana limited partnerships are inferior to Indiana limited liability companies (and limited liability partnerships) for estate planning and asset protection purposes, I next pointed out that certain other states’ limited liability entities such as those formed in Nevada  are superior on both counts to any of those formed in Indiana. And, Indiana law makes it relatively easy and inexpensive for such “foreign” entities to qualify to do business in Indiana. Thus, for example, whereas the creditor of a member of an Indiana limited liability company may foreclose upon that members’ interest and acquire it by forced sale, the Nevada statute specifies that the “exclusive remedy” of any creditor of a member of a Nevada limited liability company is a “charging order” upon that member’s share of any future distributions by that entity: nothing more. 

            As I had noted in a previous program, Nevada law also allows for the creation of irrevocable asset protection trusts under which the persons establishing those trusts may receive or at least potentially be one the beneficiary of discretionary distributions from those trusts without exposing the trust assets themselves to the claims of creditors of such beneficiaries. Indiana law, which follows the traditional “self-settled trust” doctrine, does not now provide for such trusts although there are pending proposals to authorize them.

            The January program concluded with my usual invitation to the listeners to submit any legal questions that they might have about limited liability entities or any of the previous months’ topics of discussion, to my email address, which is thelakeshorelawyer@lakeshoreptv.com. Of course, neither those questions nor my answers to them establish a client-attorney relationship.