Why a Corp or LLC Won't Protect You in Labor Law
Most business owners form a corporation or LLC to separate personal assets from business risk. In most areas of law, that protection holds. California employment law is one of the key exceptions, and many owners don't realize the gap until they're named personally in a claim.
In this breakdown, John Fagerholm, Managing Partner at DefendMyBiz, explains when corporate protection falls short and how personal liability can attach directly to owners and supervisors.
When Corporate Protection Doesn't Apply in California Employment Law
"People start corporations and LLCs. These entities are meant to prevent personal liability for the owner," John explains. "California, though, has a strange twist on this."
In California, personal liability can attach directly to individuals who supervise employees, regardless of whether the business operates as a corporation or LLC. Anyone acting as a direct supervisor, including business owners and managers, can be held personally responsible under certain employment claims.
John notes the inconsistency compared to other areas of law:
"I don't know how that makes sense to me, because that's the point of having a corporation. In all other aspects of law, it makes sense to have a corporation if you have a business to protect your personal liability. But when it comes to employees, it doesn't matter either way."
For most small business owners, that description fits perfectly. You're involved in day-to-day operations. You're the one directing staff. Under California law, that involvement is exactly what creates the personal exposure.
Case Example: WARN Act Liability and Dissolved Corporation Risk
John walks through a client situation that illustrates exactly how this plays out.
"I had a particular situation that I was handling for a client where he had a corporation. The government actually came and shut down their business for other reasons. They had about a hundred employees."
With the business shut down and only 30 days to wrap things up, the client had no choice but to lay everyone off immediately. This is where the legal exposure began.
"Once they laid off the employees, they got sued by the employees under a thing called the WARN Act," John explains. "If you have over a certain number of employees in California, you have to give a 60-day notice before you lay off employees."
The employees filed suit. By that point, the client had already dissolved the corporation, which created an entirely separate problem.
"Once he got sued, he got sued both personally and the corporation got sued. However, since the corporation was already dissolved and no longer functioning in California not an active corporation; basically, it didn't even have the right to defend itself. In California, an inactive or dissolved corporation can still be sued, but it may lose the legal standing to defend itself."
With the corporation unable to defend itself and having no remaining assets, liability exposure shifted directly to the individual owner.
John's team worked to unravel the corporate situation, at least to create two separate parties in the litigation. "We did the work to unravel the corporation so that at least we have two parties now, but there just wasn't any way to get our client out of the litigation entirely, simply because he was a small business owner and he was running the day-to-day operations. So he was basically supervising them."
The outcome: "Luckily, we were able to settle with everybody and get him out with as little damage as possible."
What This Means for Owner-Operators and Supervisors
John's takeaway is direct:
"I don't think most business owners understand that in California, even if you have a corporation or an LLC, you can be personally held liable if you are the direct supervisor."
If you run a small or mid-sized operation and you're actively managing employees, the corporate shield that protects you in contract disputes or business obligations may not protect you when an employment claim is filed.
That's a meaningful distinction. It means employment claims require a different kind of preparation than general business risk management. Your personal exposure is part of the equation and needs to be addressed in your defense strategy.
If you've received an employment claim or want to understand your current exposure as an owner-operator, the wage and hour defense team at DefendMyBiz works exclusively on the employer side. For WARN Act and wrongful termination scenarios, see our hybrid and non-FEHA claims defense for a deeper breakdown of how these claims are handled.
Watch John's full breakdown below:
Know Your Exposure Before It's Too Late
A corporation or LLC does not automatically shield business owners from personal liability in California employment claims. This is especially true when the owner directly supervises employees or when the business entity is inactive or dissolved. Understanding your exposure early can prevent surprises about personal liability.
If you're an owner actively managing employees and want clarity on your risk, schedule a free 15-minute consultation with DefendMyBiz to understand where you actually stand. We represent employers only.
FAQs
Does a corporation or LLC protect me from personal liability in California employment claims?
What is the WARN Act, and when does it apply?
What happens if I get sued after dissolving my corporation?
I'm a small business owner who supervises my staff directly. Does that mean I'm personally exposed?
What should I do if I'm facing an employment claim as both an individual and a business entity?
Disclaimer: The above content is for informational purposes only. This is not legal or tax advice. Laws, IRS guidance, and withholding requirements can change, and outcomes depend on specific facts. You are advised to contact a qualified attorney for any legal advice.
