Daleth you are a lawyer, correct? If so, please help me understand this (this is an honest question for clarification, not a challenge).
Isn't that the whole point of a corporation, shielding you from personal liability? So in your example, the person who sues the LLC should not be able to go after the property manager's personal assets, only those owned/operated by the LLC, correct (unless they successfully pierce the corporate veil)? Otherwise, what's the point? Wouldn't individuals all the time be losing their personal assets in lawsuits when they are acting as an agent of the company? I don't recall seeing people losing their personal assets when acting as agents of a company, assuming they are doing so lawfully and reasonably.
No, it's not the whole point. To explain why, I have to explain
the difference between debts that come from contracts and debts that come from torts. Basically (this is oversimplified) there are two reasons someone could sue you:
(1) Contracts: because you had a contract with them and you breached it--for instance, if you had a contract to buy business equipment, they gave you the equipment, and then you didn't pay. Or
(2) Torts: because you intentionally, recklessly or negligently did something that caused them to get hurt--for instance, if you don't shovel your walk and they fall, or if you're a doctor and you commit medical malpractice.
So,
corporations were not invented to shield business owners from lawsuits for torts; they were invented to shield investors and business owners from being liable for the company's contractually incurred debts (i.e., contracts where the company agreed to pay someone money, or where the company agreed to provide some product or service but then failed to provide it and that failure cost the other person money). In other words, before there were corporations, if you started a business or a bunch of investors got together and put up money to start a business, and then entered into all the usual contracts for business equipment, rental space, employment contracts and so on, and then the business failed, all the creditors could come after the business owners and investors
personally to get their money back. And that's still what happens today if you're not a corp or an LLC; if you're a sole proprietor or a partnership, you're personally on the hook for your company's business debts.
Corporations were invented basically because if investors/owners are on the hook for all of a company's contractually incurred business debts, then it's really risky to start a new business.
To make it less risky, we the people decided there could be such a thing as a corporation (or more recently an LLC), so that the investors would know up front that the only money they could lose was the money they actually put into the company. If the company failed, it wouldn't take them down with it, at least not beyond the actual money they'd already put into it. I'm slightly simplifying here, because there were corporations before there was limited liability--that is, the law permitted corporations to exist before it permitted owners of them to avoid personal liability for the company's debts. Also, there are debts that are neither contractual nor tort-based (for instance, business taxes--and yes, for those you may be personally liable, corporation or not). But that's the basic gist.
So that's the background. As for piercing the veil, that's where the owner or owners gets held liable for the company's debts, and it's generally done on one of the following grounds:
- The company is basically a sham; there's no real difference between the company and its owner(s). For instance, the owners might mingle business and personal money, writing checks back and forth from personal and business accounts or using the business's money to buy personal stuff (or vice versa).
- The company's actions were wrongful or fraudulent. For instance, the owners might have recklessly borrowed or lost money, made deals knowing the company couldn't pay for them, or otherwise acted dishonestly (thus leaving the company on the brink of bankruptcy and unable to pay its bills).
It's academic quibbling whether it counts as "piercing the corporate veil" to hold a corporation's agent personally liable for the torts they commit. I think of that term as applying to contract issues, not torts, but whatever. Whether you call it piercing the veil or not, the gist is the same: if you personally commit a tort while doing your job or fulfilling your function as a corporate/LLC owner or manager, you may be personally liable for that tort. The company may also be liable, but the main issue is that YOU did something wrong that hurt someone, and so YOU are liable.
The most obvious example is this: if you go to the hospital and a doctor there commits medical malpractice that hurts you, that doctor is personally liable even though he committed the malpractice while performing his job for the corporation (nonprofit or for profit, hospitals are pretty much always corporations). If the malpractice insurance isn't enough to cover your injury, you can go after the doctor's personal assets.
Whether you're going to be personally liable for torts you commit relating to your rental business is a matter of your state's law so I can't give any specific advice there, other than to talk to an attorney in your state (and I would recommend a defense-side personal injury lawyer for that conversation, NOT a real estate lawyer). And also, I agree that INSURANCE is critical and if you do have an LLC or corp, make sure that YOU PERSONALLY--as well as any co-owners or family members who work in your business--are named as an additional insured on its insurance policies. But here are a few links just so you know I'm not smoking crack:
http://www.michbar.org/journal/article.cfm?articleID=973&volumeID=11http://www.patentlyo.com/patent/2013/01/piercing-the-corporate-veil-corporate-officers-are-liable-for-their-own-torts.html