Many business owners believe they immunize themselves from personal liability by operating their business through a legal entity, such as a limited liability company (“LLC”) or corporation. A legal entity can provide a shield against personal liability. However, there are exceptions where corporate officers and directors of a corporation or LLC members can be held personally liable for their actions or inaction.
Although merely being a officer or shareholder of a corporation does not make one personally liable for the actions of the corporation, when a corporate officer directly engages and participates in negligent conduct on behalf of a legal entity which results in injury or monetary damage to others, that officer can be held personally liable in a tort action along with the corporation he or she was acting on behalf of. For example, I once served as a trial attorney in a case filed in the Circuit Court of Maryland for Montgomery County in which the jury awarded over one million dollars ($1Million) against the president of a corporation based on written misrepresentations that the president had personally made to consumers on behalf of the corporation. More recently, business litigation lawyers at Cowie & Mott, P.A. represented a client in the Circuit Court of Maryland for Baltimore County where the court ruled that trustees and officers of a business trust could be held personally liable for actions taken on behalf of the trust. These are but a few examples of the business litigation aspect of cases where business owners have been held personally liable.
This blog post discusses the personal liability of officers, shareholders and members for conduct they take on behalf of a company, even though the company is set up as a corporation, LLC or other recognized form of legal entity.
Action or Inaction That Can Result in Personal Liability of corporate Officers and LLC Members
Maryland Business Law Attorneys
It is true that an individual member of an LLC or an officer or a shareholder of a corporation, cannot be held liable for the acts of the company merely by reason of their title and association with the company. Also, an officer or member who signs a contract as a representative on behalf of a corporation or legal entity cannot be held personal liable for the performance of the contractual obligations. This legal theory, often referred to in Maryland as the “corporate veil doctrine,” insulates corporate officers and members of limited liability companies from personal liability in these and other situations.
However, under Maryland law, the corporate veil doctrine generally does not insulate corporate officers from personal liability in negligence actions if their personal failure to exercise due care results in damage to Plaintiff. Tedrow v. Deskin, 265 Md. 546, 550 (1972) (“[t]he general rule is that corporate officers or agents are personally liability for those torts which they personally commit, or which they inspire or participate in, even though performed in the name of an artificial body”); T-UP v. Consumer Protection Division, 145 Md. App. 27, 72 (2002) (“[o]fficers of a corporation may be individually liabile for wrongdoing that is based on their decisions”). Fletcher v. Havre de Grace Fireworks Co., 229 Md. 196, 201 (1962) (an officer of a corporation may be held personally liable for torts committed by the corporation if the officer either specifically directed, or actively participated or cooperated in the corporation’s negligent conduct); Marycle, LLC v. First Choice Internet, 166 Md. App. 481, 528 (2006) (“’If an officer either specifically directed, or actively participated or cooperated in the corporation’s tort, personal liability may be imposed’”).
Under the so-called “rule of Tedrow” (cited above), corporate officers in Maryland are personally liable for negligent acts they commit in connection with the performance of a contractual duty on behalf of a corporate entity. Thus, where a corporate building company contracted to construct plaintiffs’ home and where the president of the company chose the materials for and designed a defective wooden support structure for a brick wall at the home, the Court held that the president could be liable for his participation in the alleged negligent design and construction under the same standard of care applicable to the corporate building company. St. James Constr. V. Morlock, 89 Md. App. 217, 222-24 (1991).
Likewise, where a developer contracted with an engineering company to provide engineering services for the construction of a commercial property and where the president of the engineering company made misrepresentations regarding the cost of engineering services, the Court held that under “the rule in Tedrow”, the president of the engineering company could be held personally liable for his misrepresentations. Brock Bridge LTD. Partnershiop, Inc. v. Development Facilitators, Inc., 114 Md. App. 144, 164-66 (1997).
Consultation with Maryland Business Law Attorneys to Avoid Personal Liability
Business owners, LLC members, corporate officer and members of a Board of directors are well advised to consult with a Maryland business law attorney about the manner in which they involve themselves in the daily operation of the business.
For more information about Maryland business law and personal liability of corporate officer, LLC members and other business owners in Maryland and to discuss legal strategies to protect your business from liability, contact the Maryland business law attorneys and lawyers at the Baltimore, Maryland business law firm of Cowie & Mott, P.A.