Corporate Formalities – Do They Really Matter? Absolutely!

court case, corporate formalityI regularly meet with individuals who are starting a business and advise them regarding the formation of a separate legal entity to conduct their new business such as a corporation or a limited liability company (“LLC”).  The use of a separate legal entity is important because if done correctly, it provides a way to protect your personal assets.  I always stress that forming a legal entity (i.e. a corporation or a LLC) is the FIRST step in the process to protect your personal assets.

Having a legal entity and not operating it correctly can expose you to significant personal liability.  Simply put, you need to make sure the entity’s customers are aware they are dealing with a corporation or LLC (and not you as an individual).  Do all of your correspondence and contracts with your customers clearly identify your company?  Do you always sign documents in your capacity with the company (e.g. president of the corporation or manager of the LLC)?  Do your business cards and advertising identify the company or LLC to customers?

Does any of this really matter?  The answer is a resounding YES and a review of the a recent decision by the Massachusetts District Court Appellate Division in Keane, et al. v. Waggoner, et al. Massachusetts Appellate Division of the District Court, Docket No. 13-ADMS-10033 (2014) explains why.

The facts in Keane v. Waggoner case are not complicated.  The Waggoners were dog breeders and sold a dog to the Keanes.  The Keanes claimed the Waggoners deceived them over the dog’s pedigree and sued the Waggoners.  The Waggoners also sued (filed a counterclaim) against the  Keanes claiming the Keanes did not honor the breeding rights in the contract and for spreading lies to ruin the reputation for the Waggoners.  The Waggoners counterclaim was filed in the name of the LLC under which the Waggoners claimed to have operated their dog breeding business.  After a trial before the district court, the LLC owned by the Waggoners was awarded $60,000 in damages from the Keane’s.  The Keane’s claim for damages against the Waggoners individually was dismissed because the Waggoner’s operated their business under the LLC and thus they had no personal liability to the Keanes.

Unfortunately for the Waggoners, the Appellate Division reversed the ruling of the lower court.  Specifically, the Appellate court held that the Waggoners did NOT operate their business as an LLC because the Court found that the Keanes did not know they were dealing with an LLC instead of the Waggoners individually.  As a result of this finding, the $60,000 judgment awarded in favor of the LLC was reversed.  In addition, the Appellate court remanded the case back to the District Court so that the Keane’s claim against the Waggoners personally could proceed.

The finding of the Appellate Division Court in the Keane v. Waggoner case illustrates why it is important for you to operate your legal entity properly to protect your personal assets.  The details matter.  Failure to pay attention to the details can have serious negative implications.    If you have any questions about how you are operating your corporation or LLC you should talk to your business lawyer.  If you don’t have a business lawyer, please call me at 781-585-2900 to schedule a no cost consultation.

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