Syndicators, such as Stelvio Equity Group LLC, typically use legal entities for the following purposes:
- To borrow money
- To sell shares to investors who will become owners of the company
- To manage another company
While there are many reasons to form a company rather than to conduct business in your own name, two of the most common reason are 1) to protect personal assets from liability for acts of the company, and 2) to create a structure where multiple individuals can operate as a single entity.
Liability generally means the obligation or responsibility to pay a debt. That debt may be in the form of a bank loan or lawsuit settlement. Personal liability means that a person will be personally liable for any debt incurred, even if the investment project is unsuccessful. Personal liability happens when someone signs a personal guarantee.
Therefore, when a limited liability entity, such as an LLC, owns an asset, only the assets of the entity are subject to attachment if someone obtains a judgment against the entity. This protection provided under the law protects the outside assets owned by participants in the company is called the corporate veil.
In the event a limited liability company gets sued by a third party, the corporate veil acts as a shield of protection for investors and their assets outside of the entity. Generally, so long as the management acts in the manner set forth in its governing documents, the owners may be protected from individual or personal responsibility for the company’s debts for activities performed by the company or individuals acting within their management authority on behalf of the company.
Conversely, the corporate veil does not shield individuals who perform illegal acts or anyone acting in the name of the company which is outside their managerial authority to do so.
All legal entities can provide corporate veil protections as long as the entities are operated correctly with the proper formation and governing documents in place.
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