Failure to Identify the Principal

April 13, 2006

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As a rule, in order to avoid one of the contract exceptions to limited liability, the party to a business contract should always be the principal (i.e., the limited liability company (LLC) or corporation). So it is surprising that many business owners form an LLC or corporation, but then sign contracts in their own name.

Sometimes this happens because the creditor (e.g., a supplier) fills in a form contract with the owner's name, and the owner simply signs the bottom of contract with his own name. It also happens frequently when a business converts to an LLC or corporation. Many times the owner will continue to use checks, stationery and pre-printed forms in the owner's personal name, doing business as (d.b.a.) the name of the business. Here, the owner will usually face personal liability for transactions.

If the principal's name is not disclosed, the law is clear: The owner is the party to the contract. Accordingly, he has unlimited, personal liability on the contract. The solution is simple--where the names of the parties to the contract appear, the name of the LLC or corporation, and not the name of the individual owner, should be inserted. Of course, the entity itself cannot sign the contract. The next step in preventing personal liability is for the owner to properly sign the contract, solely as an agent of the entity.

Work Smart

All contracts, checks, stationery and pre-printed forms, should be in the name of the LLC or corporation. When a business is converted to the LLC or corporate form, do not continue to use forms that are in the personal name of the individual owner.