When you are doing business it is very important to
understand who your customer is. This has nothing to do with understanding your
customer's needs, challenges, issues, or requirements. Instead it is all about
knowing with whom, exactly, you are dealing.
Is your customer a corporation? Is it a limited liability
company? Is it some other form of entity? Is it a partnership? Is it a sole
proprietor? May be there is a trade name
that does not readily reveal who or what might be behind it.
This question about identity is very important in case there
is a problem or you need to enforce an agreement.
This is important because many forms of legal entities carry
with them limited liability. Legal entities exist to shelter the owners and
investors from risk. This is often a good thing because it encourages people to
start new ventures and try new businesses. The investment of the owners is at
risk, but the point of limited liability is that the owners are not putting all
of their personal assets on the line.
The flip side of limited liability is that people or
businesses who are dealing with the entity may have a collection problem.
Don’t guess who you are dealing with. Find out who your customer is and if they are
a limited liability form of entity such as a corporation or a limited liability
company. If there is a trade name you
need to find out who or what is behind it.
Once you know who your customer is you can evaluate the risk
of dealing with them, set a credit limit, obtain guarantees, or take other action
to protect your rights. Don’t wait until
there is a problem to figure out who you might have a claim against.
Just because there is an entity on the other side of a deal
does not mean all is lost in case things do not work out. Depending on the nature of the legal claims
and what happened, a creditor may have claims against officers, directors,
employees or shareholders.
One common route around the limited liability of an entity
is called the alter-ego doctrine.
Legal entities are supposed to be people separate and
distinct from the people who own them. A
legal entity may own property and should have its own bank accounts. An owner may lose the privilege of limited liability
if they fail to treat the entity as a separate and distinct person. Hence the label “alter-ego”.
An alter-ego liability case is always fact specific. There are about fifteen factors a court will
consider in determining whether or not the limitation on liability should be
upheld. And each owner is considered
separately. So a bad acting owner may be
held personally liable for an entity’s debts where another owner who acts
better may not be liable for them. It
all depends on the specifics of the case.
Since an alter-ego claim is another layer of complexity to
get past in a court case, it is better to know about and plan for these kinds
of issues at the beginning.
