U-M Report: Court Ruling May Put Small Business Owners at Risk

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Small business owners of limited liability companies face a growing risk of being held personally responsible for a case of patent or copyright infringement, says a new report from the University of Michigan.

Limited liability separates owners from the debts and obligations of their company, but smaller companies, where a person wears multiple hats, may not be as strongly protected as a larger corporation.

“Limited liability protects owners and shareholders personally from corporate activities, but this is a distinction the Federal Circuit Court has blurred, especially in the context of small, closely held businesses,” says Lynda Oswald, a professor of business law at the University of Michigan and the author of the article in the upcoming edition of American Business Law Journal.

Oswald says the change started in 1986, when a company was found liable for a patent violation in federal court. Three of the officers were also shareholders. The court decided to evaluable personal liability, which is usually only done if when a company isn’t legitimate, such as a fraudulent operation. 

“They didn’t look at these individuals as owners, they looked at them as officers, but applied the wrong doctrine to them,” Oswald says. “The net effect is the owner liability theory is being applied to corporate officers, and once we start mixing that together it erodes the protection the law should provide.”

Smaller firms are more at risk for the misapplied doctrine because owners and officers are often the same people.

However, Oswald says there are steps small businesses can take to protect themselves. She says they can keep records of when they are acting as owner and when they are acting as officer. She adds businesses should follow all the formalities outlined in their state’s corporate law, including keeping minutes of meetings. 

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