If you are doing business as a limited liability company (LLC) and have not clearly let people know that you are operating as an LLC, you could lose the liability protection that LLCs were intended to provide.
The Alaska Supreme Court recently ruled in the case of Daggett v. Feeney, Supreme Court Opinion 7179 (June 16, 2017), that a couple who operated a contracting business was personally liable for the debts of the company because they failed to disclose to the customer that the contractor was doing business as a limited liability company. Here are the facts:
James and Nadia Daggett set up Daggett, LLC, but they operated under the trade name Alaskan Wind Indus-tries (AWI). The Daggetts were the sole members of the LLC. They advertised that AWI was a renewable energy contractor that sold and installed wind turbines for home energy generation.
The Daggetts, under the name of AWI, entered into a contract with Richard Feeney to install a wind turbine on Feeney’s property in Homer. Daggett, LLC did not appear on the contract documents. Feeney made a down payment of $32,850 to purchase the turbine, and the Daggetts began work by digging a foundation and ordering the turbine from a supplier out of California.
A problem arose when Feeney learned that the wind turbine would violate a neighborhood land covenant that prohibited structures over 35 feet tall. The turbine would have been 49 feet tall. Feeney asked the Daggetts to stop work and terminated the contract. Eventually a lawsuit was filed by Feeney to get a refund of the down payment. Feeney won a damage award of $23,250, a partial return of the down payment, plus interest costs and attorney fees, which pushed the final award to over $36,000.
The Daggetts claimed that AWI was the trade name for Daggett, LLC and therefore they were not personally liable for the damages. The general rule is that members (owners) of an LLC are not liable for the debts of an LLC. But in this case the court concluded that the Daggetts had failed to disclose to Feeney in the contract that AWI was the trade name and a “dba” for Daggett, LLC. The court concluded that the Daggetts had acted as “agents of an undisclosed principal” (Daggett, LLC) when they entered into the contract with Feeney and began perform-ing the work. In other words, the Daggetts were held liable as “agents” of Daggett, LLC—not as “owners” of Daggett, LLC—because they failed to disclose to Feeney that AWI was the trade-name of Daggett, LLC. This might seem like a subtle difference, but the nuances of the law often determine rulings.
So how might this affect your business? If you are operating as a corporation or LLC, you should make that clear to the public and to anyone with whom you are doing business. Business owners should clearly indicate that they are organized as an LLC on marketing materials, business cards, contracts, invoices, letter-head, websites, or any other materials that identify their business.
Some people want to set up an LLC with one or more subsidiary trade names. For instance, a company might be called Alaska Touring, LLC doing business as Alaska Mountaintop Tours, Alaska River Tours, and Alaska Ocean Tours. If owners of this company do not disclose to the public or customers that Alaska Mountaintop Tours, Alaska River Tours, and Alaska Ocean Tours are trade names for Alaska Tour-ing, LLC, those owners could be liable for contractual or tort liability as agents for an un-disclosed principal under the Alaska Supreme Court reasoning in Daggett v. Feeney.
This case also suggests that it may be better not to have a trade name or dba attached to an LLC. In order to enjoy the protections of the LLC, it is probably best to do business in the name of the LLC. If there are multiple forms of business, it could be prudent to set up additional LLCs. Contact our office to find out how we can help you set up and maintain your LLCs.