The Law of the Market: Single Member LLCs – The Liability Shield

Americans love to sue, and most New Hampshire individuals who own and run sole proprietorships are potential targets of claims from their customers, suppliers, their own employees and independent contractors, and other third parties. If you own a business in New Hampshire, the easiest way to protect yourself against such a claim is to run your business as a single member LLC, as the New Hampshire LLC Act provides you with protection in the form of a shield of legal liability.

However, there are situations where an LLC Liability Shield will protect you from these claims and other situations where it will not. Every New Hampshire individual who owns a single member LLC should have at least a basic understanding of both types of situations. Since several hundred and potentially a few thousand people reading this column own or could possibly own New Hampshire Sole Proprietorship LLCs, in this column and in one or more subsequent columns, I will provide a plain English explanation of these situations.

The starting point for today’s article is necessarily the liability protection provisions of the New Hampshire LLC Act, which are set out in section 23 of that act. This section provides, in essence, that the liabilities of an LLC shall be solely those of the LLC itself, and it provides that no member or manager of the LLC shall be liable for such debts merely because they are a member or managers. So, for example, if an employee of your LLC injures a third party while working for your LLC, you will normally not be liable for that injury, thanks to your New Hampshire LLC legal liability shield.

However, nothing in the law is simple, and there are ten main types of situations in which the Section 23 liability shield will not protect members or officers of New Hampshire LLC. The four most important situations are briefly described below. To be concrete, I will assume that each of these situations involves a single-member New Hampshire LLC called XYZ, and I will assume that the member and director of XYX is a hypothetical person named Mary Jones.

1. Direct Liability of Member or Manager. Section 23 will not protect a member or manager of the LLC if a third party makes a claim against the LLC based on the direct personal misconduct of the member or manager.

Example. As part of XYZ’s business, Mary drives an XYZ truck and carelessly strikes and injures John Jones, a pedestrian. Due to her personal negligence, Mary will be personally liable to Jones for her injury despite her single-member LLC liability shield.

2. Vicarious Liability of Member or Manager. Section 23 will not protect LLC members or officers if they are indirectly liable for a third party claim against an LLC.

Example. XYZ owns a commercial building and leases it to ABC, a New Hampshire manufacturer. Mary engages a third party, Steven Smith, to manage the building and, in particular, to ensure the physical security of visitors. Mary does not adequately investigate Smith’s competence and is therefore unaware that visitors to other commercial buildings he manages have been physically harmed by unsafe conditions. A visitor to the ABC plant in the XYZ building is injured due to unsafe conditions. Smith will be personally responsible for this injury, but also Mary for her negligence in hiring Smith.

3. Pierce the veil. Section 23 will not protect LLC members or managers if their LLC is indebted to a third party and the third party succeeds in bringing a claim against the member. A sail piercing claim is a claim that, regardless of any legal liability shield, an LLC member should be held liable for an LLC debt because of fundamental equity – for example, because the LLC member never bothered to get liability insurance for the LLC. Because of the potentially major risk veil-piercing poses to New Hampshire single-member LLCs, I will not provide an example of veil-piercing here; instead, I will discuss the doctrine of piercing the veil in detail in a future column.

4. Liability under non-LLC statutes. Section 23 will not protect LLC members if they are personally liable for their LLC’s debts under non-LLC law, such as a federal tax law holding business owners personally liable for taxes that their business does not pay.

John Cunningham is an attorney licensed to practice law in New Hampshire and Massachusetts. He is legal counsel for the law firm McLane Middleton, PA. Contact him at 856-7172 or [email protected] His website is llc199a.com. To access all of his Law in the Marketplace columns, visit concordmonitor.com.

Law in the Marketplace is a legal advice section. It airs weekly in the Sunday Business section. The author is a lawyer at Concord and is not a staff member of the Monitor.