Financial liability

First, could I end up paying claims for the rest of my life? That's one of my main questions.

You Want Protection From Personal Liability for the Group's Activities

If your group finds itself the target of a lawsuit, incorporation can provide welcome peace of mind. Nonprofit corporations can be sued -- but their members and directors are generally protected from personal liability, meaning that their own money, houses, cars or other property isn't at risk. That's not true of an unincorporated association.

SELLING TO A LIMITED LIABILITY COMPANY (LLC)

One of the benefits for principles of a limited liability company (LLC) is limiting their liability to the amount invested into the business. By creating an LLC, the principals or members have legally separated themselves from the liabilities of the business. Any normal liability resides with the organization and the LLC, not the owners, members or principals of the business.

If the business incurs a debt, loan, trade obligation, etc., it is the LLC that legally owes the money to the creditor, not the members. If the business is sued, it is the LLC that will be liable if the plaintiff wins the lawsuit. If a lien is placed on the assets of the business, it is the LLC that is held accountable, not the principals of the business.

For entrepreneurs, starting a business without taking the steps to limit potential liability is foolhardy. It would be worse than driving a car without insurance. There are just too many risks to go without insurance or go without a plan to limit potential liabilities. It is safe to say that without the limited liability features of an LLC, a great number of businesses would never have opened their doors.

Piercing the LLC Veil

As good as the limited liability feature is, the liability umbrella does not protect the members from every type of liability that could be encountered. That is good, especially when you, the creditor, would like to pierce the LLC veil to get to specific members or principals of the business.

Limited liability companies are similar to corporations in that people have abused the liability protection provided to them in the law. Whether the abuse was intentional or not, the courts realized that it was not fair to always allow a corporate shareholder or LLC member to benefit from the limited liability protection. The courts began to rule that under some circumstances, the corporation and/or LLC was just a veil which served to protect a person who should not be entitled to the limited liability protection.

Here are some basics behind the liability issue. LLC members are liable only up to the amount of their capital contributions and the amount they agree to contribute to the firm's capital. LLC member may also be personally liable for LLC debts if they personally guarantee those debts.

When it comes to piercing the veil; however, there are several main areas where the individual members can be held liable:

1. Negligence. Members may be liable for the liability created by their own negligence.

2. Inseparability. LLCs are formed as an entity that is separate and distinct from its members. If the members take action that causes the LLC's separate identity to disappear, the LLC veil may be pierced. An example would be if the members conducted business as if there was no LLC. If the business is set up as an LLC, then the members must operate that way.

3. Undercapitalization. As a distinct entity, an LLC is expected to own assets and have financial capacity to adequately carry on the business. When the LLC is simply a shell without financial means or capacity, then investors and creditors cannot be repaid.

4. Illegal Purpose. Like negligence, this is an obvious reason to disallow the liability protection. A business cannot defraud individuals and expect to get away with it.

5. Formalities Not Complied With. This may be considered as a technicality, but in order to operate as a LLC, the business must complete all of the requirements for being an LLC and do the things necessary to maintain that status. An example is if the state requires the LLC to pay an annual fee and it has not not done so, then the members may become personally liable.

6. Equity and Justice. There are times when the courts will make rulings to pierce the veil based upon equity and justice. These are things that don't fit 100% into the first 5, but which may touch any or all of them.

The bottom line is that a Limited Liability Company does provide liability protections to the members, but there are ways for creditors to pierce the liability veil if the LLC or the members do not operate properly.

husker, Many of the partners in Arthur Anderson were LLC, and many individuals were sued. Incorporation is not always a protection against law suits. People can name board members and officers of nonprofits, and they must still get legal counsel to protect themselves. That's the reason why incorporated nonprofits buy D&O and E&O insurance.

ehBeth, I'm not sure how the "afford to lose" thing applies here -- I've been trying to explain that the conference itself is NOT a fundraiser, but that seems to keep being a source of confusion. The conference, in May, is what I am raising money FOR. The cost of the conference is approximately $150,000 -- the hotel, travel expenses, souvenirs, yadda yadda yadda.

So if we lose money on the conference, there isn't some larger organization to absorb the cost. The conference is the organization. If money is lost, bills don't get paid.

So if the bills don't get paid, then what?

Is it sufficient if the objections appear in the official minutes? And if not, and I do present my objections in whatever more legal form, does that in fact protect my can?

Generally, my strong recommendations were taken fairly well, and it looks like there will be a good amount of cost-cutting.