by Elizabeth BoweryDoes Forming an LLC Protect Members from Personal Liability?
Business founders often form a Limited Liability Company (LLC), expecting the LLC structure to shield them from personal liability for the company’s debts and obligations. While Maryland law does provide meaningful liability protection for an LLC member, it does not categorically prevent the member from being held liable in an individual capacity.
Under Maryland law, an LLC member generally is not personally liable for the obligations of the company solely because they are a member. In most circumstances, creditors seeking to collect a business debt must look to the LLC’s assets, not the member’s personal assets. That protection, however, is limited to liability arising from ownership status alone and does not extend to liability based on an individual’s own conduct or independent legal obligations.
As a result, an LLC member may still face personal liability in several situations, such as:
- Signing a personal guarantee of company debt
- Liability imposed directly by statute
- The member’s own tortious conduct (for example, fraud).
The LLC’s liability shield is strongest when the company is operated as a separate legal entity serving a legitimate business purpose. Maryland courts generally pierce the LLC veil only to prevent fraud or enforce a paramount equity. In evaluating whether that standard is met, courts may consider factors such as the LLC member treating the LLC as an extension of personal finances or using the LLC to facilitate unlawful conduct. These practices can undermine the liability framework and weaken the argument that the LLC should shield the LLC member from personal exposure.
Understanding the scope and limits of LLC liability protection is a critical aspect of building and protecting a business. As business lawyers, we assist business owners at every stage of ownership, offering guidance in selecting the best entity, drafting customized governing documents, and providing ongoing business counsel.
by Samantha ChanStarting a New Business in Maryland
The beginning of a new year is a popular time to launch a business. Whether you’re expanding on an existing idea or starting from scratch, the early planning stages involve many exciting decisions. But it’s important not to overlook the legal groundwork of starting a new business. A solid legal foundation can save you significant time, money, and stress if issues arise later. As you map out your next steps, here are key considerations:
1. Choose the Right Business Structure
Maryland offers several options, each with different liability and tax implications:
- LLCs – The most common for small and mid-size businesses. Popular because it may shield individuals from personal liability.
- Corporations – Better for companies seeking investors or issuing stock.
- Sole Proprietorships/Partnerships – Easy to set up, but offers little to no personal liability protection.
Filing with the Maryland Department of Assessments and Taxation (SDAT) is only the first step when starting your new business. The structure you choose affects ownership rights, management, and how disputes will be handled later on.
2. Don’t Skip the Operating Agreement
An LLC without a written operating agreement is vulnerable. Maryland law recognizes these agreements, and courts rely heavily on them during disputes.
Your LLC operating agreement should clarify:
- Ownership percentages
- Voting and decision-making
- Profit distribution
- Buy-out provisions
- What happens if owners disagree or someone leaves
Many lawsuits arise from businesses formed with handshake agreements or online templates. A tailored operating agreement may significantly reduce that risk. If your company is structured as a corporation, then it is required to have written bylaws.
3. Use Clear, Written Contracts
Every business relationship should be documented: vendors, contractors, employees, and partners. Written contracts protect expectations and reduce misunderstandings.
Important terms include:
- Payment and deadlines
- Scope of work
- Termination rights
- Venue and dispute-resolution language
- Intellectual property and confidentiality
Even simple agreements help prevent disputes and protect your rights if one occurs.
4. Keep Good Records From Day One
New businesses often overlook evidence preservation, but maintaining good records can help resolve problems if a dispute arises later.
Build good habits early:
- Use accounting software
- Keep receipts, emails, and contracts organized
- Store digital records securely
- Have a document-retention policy
Strong record-keeping makes your business more efficient and better protected.
Whether you are just starting to form your business or are already in the thick of running it, Lewicky, O’Connor, Hunt, and Meiser has a team of experienced business attorneys who can assist you both in preventing problems before they arise and in navigating issues when they do. Schedule your consultation today for help keeping you and your business on track.
Disclaimer: Any questions regarding tax obligations, consequences, or planning should be directed to a qualified tax attorney, accountant, or other licensed tax professional. This article does not provide detailed or comprehensive information about taxation matters.
by Elizabeth BoweryBeware of Business Opportunity Schemes: What Maryland Business Owners Need to Know
When setting out on a business venture, new business owners can be vulnerable to fraudulent schemes. One prevalent scheme involves the sale of a “business opportunity.” Scammers employ deceptive advertising and high-pressure sales tactics to peddle ostensibly low-risk, lucrative business opportunities and swindle their victims.
Under Maryland law, a “business opportunity” is defined as an arrangement between a seller and a buyer. In this arrangement, the seller solicits a prospective buyer to purchase products, equipment, supplies, or services to enable the prospective buyer to start a business. The prospective buyer is required to make a payment, and the seller represents, directly or indirectly, that it will help the prospective buyer make the business successful. For example, the seller may claim it will help the prospective buyer secure accounts or a prime location. Unfortunately, some of these offerings are fraudulent.
How the State of Maryland Has Taken Action
To combat this, the State of Maryland enacted a law to regulate the sale of business opportunities and fight against these deceptive practices. The Maryland Business Opportunity Sales Act sets forth several requirements for the seller of a business opportunity, including:
- registering the business opportunity with the state,
- providing the prospective buyer with a written disclosure statement at least ten business days before the prospective buyer executes a contract, and
- in some cases, such as when income is guaranteed, posting a surety bond with the state.
The Federal Trade Commission, the federal consumer protection agency, also addresses this issue with its Business Opportunity Rule. As a result, sellers of business opportunities operating in Maryland must comply with both state and federal requirements.
Protect Yourself From Fraudulent Business Opportunities
Despite these measures, sellers of fraudulent business opportunities continue to target unsuspecting, first-time business owners. Before committing to a business opportunity, consider consulting with a business attorney to review the disclosure statement and the sales contract to ensure compliance with state and federal standards. As business attorneys, we assist business owners at every stage of ownership, offering guidance in selecting the best entity, drafting customized governing documents, and providing ongoing business counsel.
