(Published in the Idaho Business Review, March 2007)

Anyone who owns a business is familiar with the concept of limited liability.  It is what every business owner wants and it is one of the primary reasons to form a business entity rather than do business as a sole proprietorship.  Whether we’re talking about a corporation, limited partnership, or limited liability company, the perceived advantage for forming a business entity is that an individual’s financial liability will be limited to a fixed sum, most commonly the value of the person’s investment in the company or entity, with limited liability.   

Because the law recognizes the existence of the entity as separate from its owners, a shareholder in a corporation or a member of a limited liability company is not personally liable for any of the debts of the company, other than the value of his or her investment in that company.  Of course, an owner can obligate him or herself for the debts and obligations of the company through the owner’s own wrongs, or for debts the owner contractually assumes or guarantees.   

Recently however, the Idaho Supreme Court issued an opinion in J.R. Simplot Company v. Bosen, that may have greatly expanded the way in which an owner of a limited liability company can become personally liable for the debts of a company by not properly signing a contract.   

In Bosen, two couples purchased 5,100 acres of farm property in Cassia County, Idaho.  Shortly after the purchase, one of the couples formed a limited liability company (“LLC”) to operate a hog farm enterprise on the property.  In order to obtain services and products for chemical and fertilizer applications to farm the property, one of the principals (Bosen) completed and signed a form from a supplier entitled “Commercial Sales Agreement” (“Agreement”).   

In completing the Agreement, Bosen wrote that the customer on the account was to be the LLC, and he checked the box designating LLC to indicate the type of ownership in the company.  At the bottom of the Agreement was a separate paragraph entitled “Agricultural Business Agreement.”  This paragraph stated that the applicant on the Agreement agreed to pay the total amount due on each invoice and additionally agreed to service charges and all additional costs incurred by the supplier in collecting payments past due, including attorneys fees for litigation.   

The Agreement did not specify whether the “applicant” was also the “customer.”  In the box for the applicant’s signature, Bosen wrote his own name without indicating that he was signing on behalf of the LLC or in any other representative capacity.   

The Agreement could have been interpreted as Bosen signing in his individual capacity as Applicant or in a representative capacity as the agent for the LLC.  The Court also considered a separate security agreement and a financing statement signed by Bosen which were executed to provide security for the debt that would be created by extending credit under the original Agreement.   

In addition, the Court considered the fact that Bosen had been involved in farming and ranching for 40 years and during that time had engaged in business as a sole proprietor, a partner in a partnership, a shareholder in a corporation, and a member of a limited liability company. The Court noted with that experience, Bosen had filled out the Agreement with a strong knowledge and background of “normal business practices.”   

Ultimately, the Court upheld the lower court’s decision to find Bosen personally liable under the Agreement because he had signed the Agreement without indicating that he was signing in a representative capacity and had thereby obligated himself and the LLC as parties to the Agreement. 

The lesson that is learned from Bosen is as important as it is simple.  An owner in a company should be careful how he or she signs any contract related to the company.  When signing a contract on behalf of an entity, it is crucial that you provide the necessary information on the signature block that indicates you are signing the contract in your representative capacity only, and not as an individual.

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