Your business is organized as a limited liability company, corporation or other entity. Its legal name includes a suffix such as ‘Inc.’ or ‘LLC’. However for marketing or other purposes, you wish to use the name without the suffix. A problem? Yes.
Individuals, acting by themselves or with a group, are generally responsible for their actions; that is, they have general liability for their actions. By forming an entity such as a limited liability company or corporation, each individual in the group can shield him or herself from general liability, can limit their liability to their investment in the entity. The states permit—or even promote—this as a means of encouraging individuals to take risks and start businesses.
Under certain circumstances, the limited liability of the entity can be lost; and general liability can extend to its owners. This is known as “piercing the corporate veil” or “piercing the entity veil.” As is the case with many legal issues, the reasons for piercing the entity veil are complicated and vary from state to state. To compound the problem, there are few statutes that govern this issue; the individual state law is primarily derived from common law and court decisions.
Notwithstanding, there are issues that are generally common to individual state laws. The entity veil may be pierced and the limited liability shield of the entity lost, if the owners:
- fail to incorporate or form the entity
- abuse the privilege of formation to perpetrate a fraud or injustice or otherwise circumvent the law
- use the entity as a mere instrumentality of themselves, by
- commingling personal and entity funds or assets
- commingling business functions
- transferring assets without the proper formalities
- failing to observe corporate formalities
- deliberately undercapitalizing the entity
- siphoning entity funds
- representing themselves to third parties as individuals or partners rather than as officers or members of the entity
- fail to disclose formation to third parties
- fail to use the entity name
Several of these issues directly impact the use of an entity name without its proper suffix. Failing to use the suffix can mislead outsiders to believe that they are not dealing with an entity with limited liability, but rather one with general liability, such as a sole proprietor, a loose confederation of individuals or a general partnership. None of these would have limited liability.
To be blunt, if you use an entity’s name, without its suffix, you may lose the entity’s limited liability shield.
First possibility: Always use the proper suffix with your entity’s legal name. This puts third parties on notice that they are dealing with an entity with limited liability.
Second possibility: Most states allow entities to file certificates indicating the trade name that the entity will be using. (Trade names may also be called dba’s or assumed, fictitious, alternate or false names.) If so, carefully fill out the states’ forms and file it. A filing should be done in each state in which the trade name is used. And, depending on the state, may need to be done on a periodic basis.
As always, should you have any concerns, I’m available to discuss them.
Alan N. Walter