Company Sued: Who is Liable for Payment of Expenses?
When a company faces legal action, the question of who is liable for the associated expenses often arises. This can be a complex issue, as the rules vary based on the legal status of the company. Whether a corporation, a sole proprietorship, or another form of business entity, understanding the liability is crucial for effective management and compliance.
Corporation vs. Sole Proprietorship
In most cases, if a company is incorporated as a corporation, the shareholders are generally not personally liable for the company's debts or legal expenses. The corporate shield protects the owners from direct liability, meaning the company is responsible for its costs and any judgments made against it.
However, if the business operates as a sole proprietorship, the situation can be different. In this case, the owner directly assumes responsibility for the company's debts and legal expenses. The owner’s personal assets can be at risk if the business encounters financial difficulties or is involved in legal action.
Legal Entity Setup and Liability
Whether a company is liable for expenses in a lawsuit depends significantly on how it is legally setup. A properly incorporated company typically insulates the owners from personal liability, provided the lawsuit is exclusively against the company. This protection is established under various specific laws, which can vary from one jurisdiction to another.
A sole proprietorship, which often lacks formal legal entities, can expose the owner to potential liability. In such cases, the owner’s personal assets could be at risk if the business is sued, depending on the local laws.
The legal entity’s separation from personal assets is a critical aspect of business protection. Ensuring that the company maintains this separation can help protect owners from being personally sued.
Exceptions and Directors' Liability
While the general rule is that the company is liable, there are exceptions. Directors can be held personally liable under certain circumstances. This typically occurs when the harm is a result of actions that would be unreasonable for a reasonable company during its ordinary business operations.
Another exception involves trust collections, where a company, such as a trustee, collects statutory taxes on behalf of the government and fails to remit them due to the actions or omissions of the Directors. In such cases, the Directors could face personal liability.
Cost Awards and Liability
When it comes to legal costs, the awarding of costs in a lawsuit can vary. In the United States, costs are generally not awarded, meaning the company alone is responsible for any expenses associated with the lawsuit. However, in some jurisdictions, costs can be awarded, making all parties liable for their respective costs.
If the company is incorporated, the liability for costs remains with the company. In the case of an unincorporated sole proprietorship, the owner is responsible. Therefore, it is essential to determine whether it is the company or the owner who has been sued.
Understanding the specific legal implications and consulting with a legal expert can help navigate such scenarios and mitigate potential risks.