Personal Commission of a Tort

April 13, 2006

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There are some tort exceptions to limited liability that would negate carefully constructed asset protection plans and expose an owner to unlimited personal liability.

Under tort or personal injury law, if an individual personally commits a tort, that person is liable to the injured party. This is true irrespective of whether the individual was acting as an agent for another party at the time he or she committed a tort. Of course, if the individual was acting as an agent, the principal (business) would automatically be liable as well.

Consistent with this general rule, if the small business owner commits a tort while acting as an agent for his limited liability company (LLC) or corporation, the owner is liable to the injured party. The fact that his LLC or corporation also will be liable is not relevant to the owner's personal liability.

Many states codify this exception in their statutes governing professional corporations (PCs). All states incorporate this exception into their statutes that govern professionals (doctors, lawyers, architects, electricians, etc.) operating in the form of LLCs (or limited liability partnerships). Even when the provision is not statutory, however, the rule is universally applied by the courts, as a matter of common law.

This exception can be encountered even in a business that sells goods and provides no services. This is especially true in a business that involves risk of injury to the customer (e.g., operation of a lumberyard). An owner who personally stacks the store shelves or loads a customer's car in a careless manner will have personal liability for his negligence. An auto accident caused by the owner of the business represents another commonly encountered example of this exception. This, of course, can occur in almost any business.

Nevertheless, this exception to limited liability will represent perhaps the most significant exposure to liability for the small business owner who operates a personal service business.

Warning

Operation of the business in the form of an LLC or corporation will not save the owner from unlimited, personal liability in this instance.

The exception to limited tort liability underscores why it is dangerous to rely on one asset protection strategy (e.g., formation of an LLC or corporation). Here, the owner will have to rely on other asset protection strategies, such as exemption planning, asset protection trusts, insurance, etc.

Despite this exception, however, the LLC or corporation still offers significant advantages to the small business owner in terms of limited liability protection from torts committed by co-owners and other employees of the business, as illustrated in our case study on tort liability in an LLC.