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Can a business owner be held personally liable for the obligations of an entity operating under a tradename?

In Virginia, a business entity is permitted to operate under a name that differs from the legal name of the entity. For example, a restaurant business owned by “John Doe, Inc.” could choose to operate under the name “Johnny’s Diner”. This operating name is generically referred to as a tradename, but may also be referred to as a “DBA” (doing business as), or “A/K/A” (also known as), or “T/A” (trading as). The technical legal term for a tradename in Virginia is a “fictitious name”.

Virginia law requires any business entity (domestic and foreign) operating under a tradename in Virginia to register the tradename in the clerk’s office of the Circuit Court of the city or county where the business will be conducted. This is accomplished by filing and recording a notarized fictitious name form, signed by an authorized agent of the business (note that each Clerk’s office has its own form and procedure for filing the form). In addition, the business entity must record a certified copy of the fictitious name form in the Clerk’s Office of the State Corporation Commission. The purpose of the dual recordation requirement is to prevent fraud and deceit by providing the general public with both a local and statewide resource from which to discern the legal owner of the business. Following registration of the tradename, it is still a good business practice to inform the public of the entity behind the tradename, which can be done by putting the legal name of the entity on the company website, business cards, letterhead, and signature blocks of e-mails. In addition, all contracts should be signed under the name of the legal entity.

A business owner that fails to register a tradename can be sued personally for obligations of the business. In such an action, the creditor takes the position that the owner is the agent of an undisclosed principal, and therefore, is personally liable for the debts of the principal. In addition, a creditor may use the business owner’s failure to register a tradename as a theory to “pierce the corporate veil” of the business entity and hold the owner personally liable for the debt of the entity.

In most cases, the business owner will be able to avoid personal liability by subsequently registering the tradename and demonstrating to the Court that the creditor knew at all times it was engaging in a transaction with a business and not an individual. However, an owner can be exposed if the Court determines that the owner engaged in any deceitful business practices, or that the owner is attempting to utilize the limited liability protection of the entity for a personal transaction. Virginia law does not expressly provide that a business owner who fails to register a tradename is personally liable for the entity’s obligations, but liability can be created under certain circumstances. It is, therefore, important for business owners to take the extra step of registering tradenames at both the local and state level.

 

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Gross & Romanick, P.C. can file your company’s fictitious name form at both the local and state level for a reasonable flat fee.  Please consider our law firm for all of your business legal needs, including start-up and formation, reorganization, agreements between business owners, contract review, commercial lease review, partnership disputes, employment matters, litigation, and debt collection. We can act as your entity’s registered agent in Virginia for a reasonable annual fee. Go to www.gross.com to learn more about us. Call us at 703-273-1400 or send an e-mail to law@gross.com.

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Gross & Romanick, P.C. is a law firm located in Fairfax, Virginia. Since 1980, our attorneys have dedicated themselves to providing cost efficient legal services to individuals and businesses in Northern Virginia and the Washington, D.C. Metro Area. We meet our clients’ needs by applying hard work with integrity to find creative and practical legal solutions.   Our extensive business litigation experience, and our understanding of the transactional mistakes that often lead to expensive courtroom battles, helps us to advise our clients on business deals and the resolution of commercial disputes.  To learn more about our firm, visit:  www.gross.com or call us at 703-273-1400