The most often cited reason for conducting a business under the form of a separate entity is to obtain “limited liability.” Although not a protection against professional negligence, limited liability is an advantage of some significance. The Oregon Legislature has enacted rules restricting the scope of vicarious liability for professional service providers, but only those conducting operations under given forms of entities. For architects, the Legislature has gone further to provide that this group of professionals may conduct operations as a regular business corporation (rather than as a professional corporation), thereby insulating the architect’s personal assets from those bringing tort claims against their respective companies.
To understand the differences between the various liability limitations available to professionals, one must first understand the notion of vicarious liability. Vicarious liability is not to be confused with liability that is placed upon an individual for damages caused by that individual’s own negligent or wrongful conduct or for those caused by that person’s negligent supervision of others. Such personal liability cannot be avoided regardless of what type of entity under which that individual chooses to conduct business.
Rather, vicarious liability is a form of liability imputed to an entity or individual who has not committed any negligent or wrongful act, but who is nevertheless responsible for damages as the result of another individual’s negligent or wrongful conduct. This is a form of strict liability; if a claimant successfully establishes that an owner or employee of the entity has caused damage by a negligent or wrongful act within the scope of their duties, the doctrine of vicarious liability imposes liability on the owners of the entity in many instances, regardless of the fact that the owner had no immediate involvement with the activity causing the damage.
The reason legal institutions are willing to impose such liability is a perceived allocation of the risks of doing business. The losses caused by the acts of employees, which as a practical matter are sure to occur in the conduct of the employer’s enterprise, are placed upon the enterprise itself, as a required cost of doing business. The employer is engaging in an enterprise which will, on the basis of past experience, involve harm to others caused by the torts of employees. Because the owner seeks to profit from the enterprise, it is just that the enterprise and the owners of the enterprise, rather than the innocent injured plaintiff, should bear the cost of these losses. In addition, the imposition of such liability seems sound, as the owner is better able to absorb the cost of such damage, through charging higher prices and purchasing insurance. Further, the owner is in the best position to make changes in the business which would tend to avoid such losses.
- Partnerships. There are no established limitations on an individual’s liability for operations and acts performed in conjunction with others in a partnership form of entity. In a partnership of professionals, each partner faces unlimited liability for his or her own negligent or wrongful acts, as well as unlimited, vicarious personal liability for those of all the other partners and employees of the partnership acting within the scope of their employment. ORS 68.270(1)(a). Each partner also faces unlimited liability for the other debts, obligations, and liabilities of the partnership. ORS 68.270(1)(b).
- The Professional Corporation. A number of years ago, the Oregon legislature adopted a limit to the vicarious liability for professionals performing professional services under the form of a professional corporate entity. Since that time, an architect who is a shareholder of a professional corporation remains personally liable for his or her own negligence and is also liable for the damages caused by the negligence and for the wrongful acts of all other corporate shareholders and employees up to a maximum of $300,000 per year. In 1995, the Oregon Legislature implemented a corporate cap of $2,000,000 per year in the event there are more than six shareholders. ORS 58.185. Like a standard corporation, though, the professional shareholder is generally not personally liable for the debts or other contractual obligations of the corporation.
- Limited Liability Partnerships. Today, professionals conducting business under a registered limited liability partnership form of entity benefit from the same limit on liability for individual partners as do those conducting operations under a professional corporation, meaning that the $300,000 annual personal liability limit discussed above in paragraph 3 applies. ORS 68.270(6). Each partner is not otherwise liable for the debts, obligations and liabilities of the limited partnership solely by reason of being a partner or acting in that capacity; however, each partner may be personally liable, without limit, for obligations of the partnership: (i) that arise before the registration of the limited liability partnership; or (ii) for which a majority of the partners have consented to the extension of personal liability to individual partners.
A partnership can become registered as a limited liability partnership in Oregon by merely filing an application for registration with the Secretary of State which contains sufficient information to comply with ORS 68.715. Such information includes the name of the partnership, the address of its principal office and address for mailing notices, a statement regarding the primary business activity of the partnership, the partnership’s EIN, and the names and addresses of at least two partners of the partnership.
- The Corporate Form of Entity. Interestingly, architects, but no other processionals, may now form a regular corporation and escape vicarious personal liability entirely. Generally speaking, a corporate shareholder’s maximum loss is limited by that shareholder’s total investment in the corporation. A shareholder is not liable to the corporation or its creditors beyond the shareholder’s obligation to pay for the shares as agreed. ORS 60.151(1). A shareholder of a corporation is not personally liable for the acts or debts of the corporation merely by reason of being a shareholder. ORS 60.151(2). While the corporation remains liable for the torts committed by its employees acting within the scope of their employment, liability may only be imposed against the individual shareholder by successfully “piercing the corporation’s veil,” or because of specific conduct of the shareholder in performing an alternate role for that corporation (such as in his or her role as an officer, director, or employee of the corporation).
A court has the power to pierce a corporation’s veil (imposing personal liability on the shareholders of a corporation) only in cases where the claimant is successful in establishing fraudulent activity on the part of the shareholder, or in cases of undercapitalization combined with the failure of the company to obey corporate formality requirements. In addition, a shareholder who is also acting as a director of a corporation may face personal liability for failing to honor his or her fiduciary obligations toward the company. Beyond this, it is the corporate entity which is liable for the torts of its officers and employees acting within the scope of their employment and not its shareholders.