BUSI 561 Week 7 DB Forum 3: Thread Example

Discussion Board Forum 3: Agency and Business Organizations

BUSI 561 Legal Issues in Business, Discussion Board Forum 3: Thread

Thread by [Student Name]

The forum prompt and the landscaping company in the thread are composites standing in for the course's own prompt; the cases, the research and the Scripture cited are real, and the requirements follow Liberty's public course guide for BUSI 561.

Thread

Consider a composite landscaping company organized as a single-member LLC. Its owner started the company with $1,000, paid for her groceries and her own car insurance out of the company's account, never kept minutes or separate books, and let the company run up $40,000 in unpaid invoices with a mulch supplier. Then a company truck, driven by an employee, struck a homeowner, causing serious injuries far beyond the company's $50,000 insurance policy. Both the supplier and the homeowner have sued the owner personally. Her lawyer tells her that the LLC should protect her personal assets. Whether it will depends on the doctrine known as piercing the corporate veil.

Why Limited Liability Exists

Kubasek et al. (2016) explain that corporations and LLCs are legal persons separate from their owners, so the entity's debts are its own, and owners risk only what they invested. That protection is the main reason small business owners choose these forms over sole proprietorships and general partnerships, in which owners are personally liable for all business debts.

Easterbrook and Fischel (1985) explained why the law grants this protection. Limited liability reduces the cost of monitoring managers and other shareholders, since an investor's maximum loss is fixed; it allows shares to trade at a single price regardless of who owns them; and it encourages diversified investment and risk taking that benefits the economy. But they also recognized its cost. Limited liability shifts some of the risk of business failure to creditors, and that shift is most troubling for involuntary creditors such as tort victims, who never had a chance to negotiate for protection or charge a higher price, and in small, closely held firms where owner and entity are hard to tell apart. Their analysis predicts that courts should be most willing to pierce in exactly those settings.

How Courts Actually Apply the Doctrine

Courts typically pierce the veil when owners have disregarded the entity's separateness and when respecting it would produce fraud or injustice. The factors the textbook describes include undercapitalization, commingling of personal and business funds, failure to observe corporate formalities and use of the entity to defraud creditors (Kubasek et al., 2016).

Thompson (1991) examined roughly 1,600 veil-piercing cases and found that courts pierced in about 40 percent of them. Every piercing involved a close corporation or a corporate group; no court in his sample pierced the veil of a publicly held corporation. Piercing was more likely the fewer shareholders the corporation had, consistent with Easterbrook and Fischel's prediction. One finding was surprising: courts pierced more often in contract cases than in tort cases, even though contract creditors, like the mulch supplier, could have protected themselves by demanding a personal guarantee or checking the company's finances. Thompson's explanation was that contract cases more often involved misrepresentation by owners, which courts treat as the kind of injustice the doctrine targets.

Hansmann and Kraakman (1991) argued that the law should go further for tort victims and make shareholders liable for corporate torts in proportion to their ownership. Their reasoning was that limited liability for torts encourages companies to take excessive risks, since some of the cost of accidents falls on victims rather than owners. Their proposal has not been adopted, but it highlights the moral asymmetry in our scenario: the homeowner, unlike the supplier, did not choose to deal with the company.

The Agency Question Comes First

The homeowner's claim also raises this week's agency chapter. Respondeat superior makes a business answer for the negligence of workers acting in the course of their jobs, so the LLC itself is clearly liable for the driver's negligence if he was on a job when the accident occurred (Kubasek et al., 2016). The question for the owner is different: can the homeowner reach her personal assets once the LLC's insurance and accounts are exhausted? Agency law gives the homeowner one more route that does not require piercing at all. If the owner was personally negligent, for example by hiring a driver she knew had a record of reckless driving or by ignoring warnings that the truck's brakes were failing, she is liable for her own conduct regardless of the entity. Limited liability protects owners from the company's obligations, not from their own wrongs. That distinction matters for advising any small business owner, because many owners assume that forming an LLC protects them from everything that happens in the business.

A Biblical Worldview on Responsibility

Scripture affirms both the principle of separate responsibility and its limits. Paul writes, "For each will have to bear his own load" (English Standard Version Bible, 2001/2016, Galatians 6:5). Read in context, the verse teaches that each person is accountable for his or her own conduct. Limited liability expresses a similar idea in business: an owner who invests honestly, keeps the entity separate and deals openly with creditors should not have to answer personally for every misfortune the business suffers.

Two verses later, Paul adds a warning: "Do not be deceived: God is not mocked, for whatever one sows, that will he also reap" (Galatians 6:7). An owner who treats the company's account as her own wallet cannot ask the law to treat the company as someone else. When owners commingle funds, starve the company of capital and use it to escape obligations they created, they are sowing the conditions for piercing. The doctrine, in that sense, is the law's way of making sure that the people who abuse the corporate form reap the consequences.

Applying the Doctrine and the Principles

Our landscaping owner is in a weak position. Starting a company that operates trucks with $1,000 in capital suggests undercapitalization, paying personal expenses from the business account is classic commingling, and keeping no separate books shows disregard of formalities. A court could well pierce the veil in the supplier's case and, with the injured homeowner as an involuntary creditor, has even stronger equitable reasons to do so in the tort case. Owners who want the protection of the entity should earn it: capitalize the business adequately for its risks, carry insurance sized to its realistic exposure, keep business and personal funds strictly separate, document major decisions and deal honestly with creditors. Those are not only legal precautions; they are what it means for an owner to bear her own load while respecting the people her business affects.

References

Easterbrook, F. H., & Fischel, D. R. (1985). Limited liability and the corporation. The University of Chicago Law Review, 52(1), 89-117. https://doi.org/10.2307/1599572

English Standard Version Bible. (2016). Crossway. (Original work published 2001)

Hansmann, H., & Kraakman, R. (1991). Toward unlimited shareholder liability for corporate torts. The Yale Law Journal, 100(7), 1879-1934. https://doi.org/10.2307/796812

Kubasek, N. K., Browne, M. N., Herron, D. J., Dhooge, L. J., & Barkacs, L. L. (2016). Dynamic business law (Biblical worldview ed.). McGraw-Hill Education.

Thompson, R. B. (1991). Piercing the corporate veil: An empirical study. Cornell Law Review, 76(5), 1036-1074.