Organizing a corporation or limited liability company (LLC) is easy and inexpensive and gives the owner the potential benefit of limited personal exposures for liabilities incurred by the business entity. However, many owners forget that it takes more to limit personal liability than just filling out some forms. The owner does not receive the benefit of limited liability unless the owner actually conducts business through the entity. If creditors do not know they are dealing with a corporation or LLC, they may be entitled to look directly to the owner for relief.
The Wisconsin Court of Appeals recently reminded us that simply organizing a limited liability company is not enough to get limited liability. In Harold Gabbei Wholesale Meats Inc. v. William Vander Pas, d/b/a Komp Bros. Market (2014AP693), the Court of Appeals affirmed a trial court decision that Vander Pas was personally liable for his unpaid bills notwithstanding his claim that he operated his business under the name Industrial Resales LLC. Vander Pas had purchased an established meat market and deli known as Komp Bros. Market. It appears that Vander Pas continued to operate the deli under the Komp Bros. Market name. In conducting his business he purchased supplies from the plaintiff, Harold Gabbei Wholesale Meats Incorporated. Wholesale Meats sued Vander Pas personally for unpaid bills. Vander Pas did not dispute that the debt was owed but claimed that he was not personally liable for the debt because Industrial Resales LLC operated Komp Bros. Market. He claimed that he told Wholesale Meats about his LLC. Wholesale Meats denied knowing about it.
The Court of Appeals reiterated that an owner or agent of a corporation or LLC is not ordinarily personally liable for the entity’s debts. However, the Court went on to explain that Wholesale Meats had no duty to inquire about its customer’s legal status; to avoid personal liability Vander Pas had the burden of proving that he was doing business with Wholesale Meats through Industrial Resales LLC and not on his own behalf. At trial, Vander Pas claimed that: (a) he provided Wholesale Meats with a “customer information sheet” that disclosed the existence of the LLC; (b) that he “absolutely” told Wholesale Meats’ delivery driver about the LLC; and (c) that he mailed payments in envelopes with the LLC’s name and return address. Wholesale Meats’ owners, salesman and delivery driver testified that they did not receive the customer information sheet and were not told about the LLC. The trial court found that Vander Pas’ claim that he informed Wholesale Meats’ delivery driver was not credible. The trial court further found that even if Vander Pas sent payments in the envelope with the name “Industrial Resales LLC” on it, he failed to give adequate notice to Wholesale Meats. In fact, the trial court stated that even if Vander Pas’ trial testimony was accepted as completely true, he still did not give adequate notice to Wholesale Meats that it was doing business with Industrial Resales LLC. The Court of Appeals affirmed the trial court’s judgment.
The Court of Appeals’ decision serves as a reminder to business owners that they should diligently and consistently disclose the existence of their business entity to customers and vendors if they expect to get the benefit of limited personal liability. It may not be enough to occasionally use the business name or casually inform a vendor’s employees of the business name. Instead, business owners should get in the habit of using their business name in all of their business relations. This means not only using the name of the business in dealings with the public but also ensuring that the name used is the correct legal name of the business.
An owner may have many opportunities to communicate the business name to customers and vendors. For instance, the name of the business should be used on business cards and on letterhead. The business checking account should be in the name of the business and the business should be identified on the checks. Business assets should be owned or leased by the business. Contracts prepared by the business and presented to the business should use the name of the business and should call for a signature on behalf of the business. The business website, Facebook page and other social media should identify the name of the business prominently. Email should include a signature block that identifies the business. All of these steps will help an owner establish that the entity has been identified. Owners who fail to take advantage of the opportunity to identify the business entity may find that, like Vander Pas, they are unable to convince a court that their customers and vendors had notice of the business.
Not only is it important for a business owner to tell the public about the business entity, it is equally important to get the name right. The owner selects a name when organizing the business under state law and that name is the legal name of the entity. It is not uncommon for business owners to become lax about the name of the entity, allowing the name to be used inconsistently or to change over time. A company organized under state law as “XYZ Bicycle Emporium” becomes “XYZ Bike Shop” becomes “XYZ Bikes.” Such casual and erratic use of the business name can lead to confusion and signal to the public that there is no difference between the entity and its owner.
Likewise, entities organized under state law are required to use an identifying term in the business name, such as “Inc.” or “LLC.” These terms tell the public that they are dealing with an entity and not just the owner personally. Often owners will omit the identifying term in their day-to-day use of the business name. Failing to identify the business entity as a corporation or LLC may lead customers and vendors to assume that the owner is simply doing business under an assumed name and that there is no separate entity. Under these circumstances, the owner may forfeit the limited personal liability that the entity is intended to provide.
On a final note, it is permissible for a business to adopt a “doing business as” name that differs from the actual legal name of the business. However, there is a risk that customers and vendors dealing with a d/b/a will be unable to tell who is using the alias. Wholesale Meats evidently thought that Komp Bros. Market was a d/b/a for Vander Pas. Vander Pas was unable to convince the trial court that it was a d/b/a for Industrial Resales LLC and ended up being held personally liable for the company’s debts.
Corporations and LLCs can afford significant protections to their owners. But, those protections may be lost to owners who do not take steps to identify the business name.
If you have any questions about how the information in this article may affect you or your business, please contact Norm Farnam at firstname.lastname@example.org or (608) 257-2281 or your Stroud attorney.
DISCLAIMER: The information in this article is provided for general informational purposes only, is not necessarily updated to account for changes in the law, and should not be considered tax or legal advice. This article is not intended to create, nor does the receipt of it constitute, an attorney-client relationship. You should consult with your own legal and/or financial advisors for legal and tax advice tailored to your specific circumstances.