Business forms and personal liability

Pit & Quarry, Dec, 2004 by Michael T. Heenan

key issues

Not too many people operate sole proprietor businesses these days. There is just too much exposure to personal liability, particularly in the mining industry. A sole proprietorship is a business owned by one person. In a sole proprietorship, the person and the business are one and the same person. There is no separation of identity or liability.

There are multiple reasons why sole proprietorships are increasingly uncommon even for sole owners. Primarily, business owners do not want everything they own to be at risk. If the business goes broke, creditors may be able to collect not only against business assets, but also against the owner's personal assets. If a customer seeks recourse against a quarry because of alleged illness related to product use, or if a quarry neighbor claims damages owing to blasting, the same issues of liability arise. There are a number of ways to protect your personal assets as a mine owner.

Corporations

The law does not require business owners to personally be at risk. Traditionally, the most common approach to avoiding personal liability has been through the formation of a corporation. Once formed, a corporation becomes a completely separate legal person. It is responsible for itself. Good faith operation and direction of the corporation by the board of directors and management will insulate the owners (stockholders) from liability.

Mine Safety Act issues

In the mining industry, there is an odd twist on liability exposure. The Federal Mine Safety and Health Act, which requires operators of mines to prevent unsafe and unhealthful conditions and practices, provides an elaborate enforcement scheme.

This can include criminal punishment as well as civil penalties for violations. The Mine Safety and Health Administration (MSHA), as the enforcing agency, would have no problem seeking incarceration of someone who owns a business outright.

But how could MSHA bring the same level of individual enforcement against the people who control a corporation? Congress answered this question by changing the law of corporations for mines.

In section 110 (c) of the Mine Safety Act, Congress has provided for personal liability of those who take action on behalf of a corporation as follows:

Whenever a corporate operator violates a mandatory health or safety standard or order, any director, officer, or agent of said corporation, who knowingly authorized, ordered or carried out such violation ... shall be suspect to the same civil penalties, fines and imprisonment that may be imposed on a mine operator.

Thus, under the Mine Act, the corporate form of business does not provide the same level of insulation as it would for nonmining businesses.

Obviously, there was a belief on the part of Congress that principals or agents of corporations should not be able to hide behind the corporation that employs them. For corporations, the Mine Act creates a special liability that does not exist for operators who use other business forms.

The Mine Act defines "operator" as a person who operates a mine. The word "person" means "any individual, partnership, association, corporation, firm, subsidiary of a corporation, or other organization." Thus, Congress recognized a range of business forms and did not put limits on what forms mine operators might use.

Partnerships

The business form that is exempt from both agent liability and personal liability for business debts is the Limited Liability Partnership (LLP).

This is different from a general partnership where every partner bears responsibility for the business debts and liabilities.

It is well established that MSHA may not investigate or impose personal liability on agents of partnerships. However, the traditional partnership leaves owners exposed to other types of liabilities--unless they adopt a form of partnership that has corporate-like liability protection.

That is exactly what an LLP encompasses. The LLP is similar to a general partnership except that, by law, the partners are not personally liable for the debts or liabilities of the LLP. This form is commonly used by professional partnerships, but, depending upon state law, may be open to other businesses as well.

Limited Liability Companies

There is something very similar that is often used by small businesses--the Limited Liability Company (LLC). This form of business has similarities to both partnerships and corporations, but exists as a separate form of business. If MSHA were to initiate a special investigation at an LLC operation, there is every reason for this investigation to be challenged on the grounds that an LLC is not a corporation. It is a distinct form of business. MSHA may argue that it is equivalent to a corporation, but in reality is it is a separate form of business and an entity in law that is distinct from a corporate entity.

Legal Tip

The Federal Mine Safety and Health Act, which requires operators of mines to prevent unsafe and unhealthful conditions and practices, provides an elaborate enforcement scheme. This can include criminal punishment as well as civil penalties for violations.