Category: Business Formation

The Important Distinction Between You and Your Corporation

It is not uncommon to see a corporation whose president is the sole shareholder.  Sometimes the president will refer to the corporation as “my company.”  Whenever the company does something, the president will personalize it.  For example, instead of saying  “In 2002, XYZ corporation (or we) acquired ABC corporation ” the president/sole shareholder will say, “I bought ABC in 2002.”

This failure to recognize the distinction between the individual and corporation can come back to haunt both the company and the shareholder.  Individual shareholders are given a shield of immunity from corporate misdeeds because the corporation is supposed to be a separate entity with a mind of its own.  A chronic failure by the sole shareholder to separate the corporation and the shareholder can lead the courts to take away the immunity.

Sometimes corporate lawyers fall into the same trap.  In the recent Hamilton County Appeals case, Torbeck v. Industrial Manufacturing Company , 2015-Ohio-3041, the lawyers for Torbeck Industries, Inc. also represented the principal shareholder, Richard Torbeck in a lawsuit.  The corporation brought five causes of action against a number of defendants.  The shareholder joined the corporation in two of the causes of action.

The Court found in favor of the corporation on three causes, but did not award damages.  The other two counts, which were the counts that both the corporation and the shareholder brought, were dismissed.  Plaintiff’ ‘counsel argued that if the defendants were liable there surely must be some damages awarded.   Plaintiffs’ counsel filed an appeal.

The problem was, the notice of appeal said, “Notice is hereby given that Plaintiff Richard Torbeck appeals.”  The Court of Appeals dismissed the appeal – the Corporation was the party who was denied damages.  Richard Torbeck’s claims were dismissed.  The wrong party appealed.  The lesson is: it is important to always to recognize the distinction between the corporation and the individual who owns it.

Why Common Partnerships Don’t Make Sense

When two or more people start a new business in Ohio, they will often form a corporation or limited liability company. Some professionals prefer limited liability partnerships to corporations or LLCs. The question I sometimes hear is: why don’t people form common partnerships anymore?

The answer is simple: liability. The general rule in Ohio is that shareholders and members (the owners of LLCs are called members rather than shareholders) are not personally liable for the bad acts of the company, its managers, officers, or employees.

The opposite is true for common partnerships. Ohio Revised Code Section 1776.36 holds each partner individually liable for the bad acts of the company and the other partners. Worse yet, Ohio law holds each partner jointly and severally liable. What this means is that if one bad partner commits a mistake, the innocent partner or partners may be the ones who pay for the acts of the bad partner.

As an illustration, let’s say the Al, Bob, and Charlie, are common partners. Al works on a project that goes terribly wrong and the company now owes a customer a million dollars. The customer can go after a judgment against all of the partners, and collect from whichever partner it chooses to collect from. It is possible that Bob pays the customer back completely while Al and Charlie pay nothing. Oftentimes, the partners then sue each other and the company goes out of business. Even if there is ample insurance, the customer will still probably sue each partner individually.

If Al, Bob, and Charlie would have incorporated or formed a limited liability company, it is unlikely they would be personally liable to the customer. Even if Bob and Charlie were personally sued, they could move to be dismissed from the case.

The laws of other states may be different, but in Ohio it doesn’t make much sense to form a common partnership.