Post 4
This will be a multi-post blog entry. This fourth post discusses how liability of owners and managers can be limited under governing documents in order to prevent personal liability.
Post 4 – Personal Liability Due to Bad Company Agreement – Limitation of Liability
We discussed in an earlier blog post that governing documents should have certain protections relating to additional capital contributions by owners, the lack of which might lead to uncapped liability for the owners of a Business. Following are additional provisions, which must be appropriately built into governing documents so that personal liability may be further mitigated.
Elimination of Duties and Limitation of Liability: The Texas Business Organizations Code allows corporations to limit liability of their directors (“Directors”) to acts done within the Director’s scope of authority.[1] This enables Directors to conduct business to undertake certain risks. This does not, however, preclude them from liability that is caused due to (a) breach of their fiduciary duties towards the corporation, (b) acts for which specific liability of the Director is provided under law, or (c) acts from which the Director derived personal benefit from a transaction, whether or not acting within his or her authority (e.g., usurping corporate opportunity).
Just like Directors of a corporation, managers and officers (“Managers”) of an LLC may also seek similar protection under their governing documents. In fact, most LLC statutes provide for additional protection and allow LLCs to “expand or restrict any duties, including fiduciary duties, and related liabilities that a member, manager, officer, or other person has to the company …[2]” in their governing documents.
These provisions afford protection to Directors and Managers from being generally held liable for their acts. While there are certain exceptions when that protection may not be upheld by a court of law, protections, nonetheless, should be specifically built into governing documents so as to limit a Director’s or Manager’s liability. When governing documents do not contain such protections, Directors or Managers might be held liable even for acts which could otherwise have been excluded or eliminated.
In emerging companies, owners and officers are sometimes the same individuals wearing different hats depending on their role, because they control the business closely. This makes it crucial that owners ensure their governing documents limit their liability to the extent possible, depending on the entity type and the business.
Our next post will discuss spousal consent in governing documents, the lack of which might entitle an outgoing spouse in a divorce to a share in the Business ownership.
About the Author
Shawn McBride – R. Shawn McBride is the Managing Member of The R. Shawn McBride Law Office, P.L.L.C. which helps clients in legal issues related to starting companies, joint ventures, raising capital from and negotiating with investors and outside General Counsel functions. Shawn can be contacted at: 407-517-0064; [email protected], or www.mcbrideattorneys.com.
Saurabh Nathany – Saurabh Nathany is a Paralegal at The R. Shawn McBride Law Office, P.L.L.C. Saurabh can be contacted at: (312) 394-9924, or [email protected].
[1] See Tex. Bus. Org. Code § 7.001.
[2] Id. § 101.401.