Clifford Gravett, Esq.
We all know the old saw, “an ounce of prevention is worth a pound of cure” and, in some cases, particularly liability associated with business dealings, it’s probably true. In the American legal tradition, there are numerous ways in which a person carrying on a business can become liable to a third party, whether through “negligence,” “intentional” acts (which may or may not have actually been intentional), or duties implied or created by state statute or common law.
Traditionally, if a person (or the person’s employees) incurred some form of liability, all of the person’s assets were available for satisfaction of a liability. Or, to put it in layman’s terms, if you’re a baker and your bakery delivery man crashes the bakery truck, your house and personal savings are at risk of being executed on to satisfy the bakery’s liability, even if you didn’t do anything personally wrong.
States recognized that this type of personal risk was a major impediment to economic growth because people didn’t want to lose all of their personal assets if the business made a mistake. Enter the limited liability company or, as it’s commonly known, the LLC. An LLC is an artificially created “person” which holds all of the liability of the company so that the owners (known as members) are not liable for the company’s acts (subject to limited exceptions).
This means that, so long as business is conducted in the name of the company, only company assets are available for judgment creditors to collect on. Additionally, limited liability laws impose special duties on the people running the company to work for the best interests of all the members. Finally, unlike a corporation (which also is a liability shielding entity), LLC’s are subject to “pass through” taxation, avoiding the double taxation issues faced by a corporation’s shareholders.
Forming an LLC in the state of Nevada is easy and requires minimal annual reporting to the state. So, there are many advantages to forming an LLC for your business activity. However, one thing an LLC will probably not do is protect you from contractual obligations, like leases and promissory notes. The reason for this is that landlords and banks, being represented by savvy attorneys, know that the members of an LLC aren’t liable for its debts and thus almost always require the members of the LLC to personally guarantee an LLC’s contractual obligations.
If you are thinking about forming or reorganizing your business activities, you should consult with a competent attorney to see if an LLC (or one of the other business entities recognized by Nevada law) is right for you. It may be the ounce of prevention that protects you from the pound of liability “cure” in the future.
Clifford Gravett is an attorney with the Mesquite office of Bingham Snow & Caldwell. He is licensed in Arizona, Utah, and Nevada and can be reached at either (702) 346-7300 or at firstname.lastname@example.org