Key Takeaways

  • LLCs generally protect members from personal liability for business debts, but exceptions exist.
  • Members can become personally liable if they personally guarantee loans, commit fraud, or engage in wrongful conduct.
  • Courts may pierce the corporate veil if the LLC is mismanaged or if personal and business finances are commingled.
  • Contractual debts depend on how the contract is signed—individual members may be liable if they do not sign in their LLC capacity.
  • Bankruptcy and unpaid business taxes can create personal liability risks for LLC members.
  • Seeking legal counsel is essential when disputes arise over LLC debt responsibility.

Limited liability company debt responsibility belongs to the company alone in most cases. In certain circumstances, however, a member of the company can be liable for a debt.

Who Is Responsible for LLC Debt?

Limited liability companies (LLCs) are legally considered separate from their owners. In terms of debt, this means that company owners, also known as members, are not responsible for paying LLC debts. Creditors can only pursue assets that belong to the LLC, not those that personally belong to members.

The important thing to remember is that these protections only apply to personal assets. If a member has contributed property or cash to the LLC, those assets can be seized to cover company debts. Additionally, creditors can file a lawsuit against the company and receive distributions of company profits that would otherwise be payable to members. With business entities such as general partnerships, creditors may pursue owners' personal assets.

If you're operating a smaller LLC or your company is brand-new, you will likely need to apply for a loan or a credit line to fund your business. Generally, creditors will request that one of your LLC's members guarantees the loan's repayment.

LLC members that personally guarantee a loan's repayment are putting their personal assets at risk. By acting as a guarantor, the member is removing the legal separation of themselves and the company, which means the creditor can personally sue the member if the LLC does not repay the debt.

Exceptions to LLC Debt Protection

While LLCs are designed to shield members from personal liability, there are several exceptions where an LLC owner can be held responsible for business debts:

  1. Personal Guarantees – If a member personally guarantees a loan or credit line, they are liable for repayment if the LLC defaults.
  2. Piercing the Corporate Veil – Courts may disregard the LLC’s limited liability if the business is not properly maintained, such as failing to keep separate bank accounts or not adhering to LLC formalities.
  3. Fraudulent or Wrongful Acts – If an LLC member engages in fraudulent business practices, misrepresentation, or intentional misconduct, they may be personally liable.
  4. Unpaid Payroll or Sales Taxes – The IRS and state tax agencies can hold LLC members personally responsible for unpaid business taxes, including payroll withholding and sales tax obligations.
  5. Tort Liability – If an LLC member personally commits a wrongful act, such as negligence that causes harm, they can be sued individually.

LLC members must take proactive steps to maintain the legal separation between themselves and the business, such as maintaining clear financial records and operating under the LLC’s legal name.

Debts Based on Contracts

An LLC can have a variety of debts, including debts that result from entering into a contract. If an LLC fails to uphold a contract, members cannot legally be held liable for the breach in most cases.

How the contract is signed can determine liability. If an LLC member has the power to sign a contract on behalf of the business, they should make sure that their signature only binds the company, not themselves. Also, if a member decides to sign a contract with their own name, they should make it clear that they are signing as an LLC member.

If you sign the contract using your legal name and don't make it clear you are signing on behalf of the LLC, the other party in the contract may be able to seize your personal assets in a breach of contract lawsuit.

Personal Liability in LLC Contracts

An LLC’s contractual obligations generally do not extend to its members. However, the following circumstances can lead to personal liability:

  • Improper Signing of Contracts – If a member signs a contract in their name rather than as an authorized representative of the LLC, they may be held personally responsible.
  • Personally Guaranteed Contracts – Some suppliers, landlords, and lenders require a personal guarantee, making the member liable if the LLC cannot meet its obligations.
  • Contracts Signed Before LLC Formation – If a contract is executed before the LLC is legally formed, the individual who signed may be liable unless the contract is later transferred to the LLC.
  • Failure to Disclose LLC Status – When dealing with third parties, members should clearly identify the LLC as the contracting entity to avoid confusion over liability.

To avoid personal risk, members should always sign agreements as “[Name], Member of [LLC Name]” and ensure the contract explicitly states that the LLC, not the individual, is the responsible party.

LLC Member Actions

An important fact to understand about LLCs is that members don't automatically have the power to act on the company's behalf. In most cases, a member can only exercise company authority with the approval of other members or if they're given the power to do so in the company's operating agreement. If an LLC member enters into a contract that costs the business money without authorization, the other members can seek compensation from the member who signed the contract.

A member's ownership stake in the LLC, or interest, is calculated based on how much they have contributed to the company. In exchange for an ownership interest, members can provide the company with monetary contributions or property. An ownership interest is much different than personal property, which can include items such as:

  • Your home.
  • Your vehicle.
  • Your possessions such as televisions, computers, and jewelry.

An exception to LLC liability protections occurs when members fail to separate personal and business affairs. In such cases, they may be held liable for the business's actions and debts. For instance, if a member is mixing personal and business funds or borrowing money from the company for personal reasons, their liability protections can be pierced. If a creditor attempts to hold an LLC member personally liable for a company debt, the courts will review the circumstances of the debt. There are a few different ways that a member's limited liability can be pierced.

When an LLC member is sued for the debts of the company, it's important that they hire a knowledgeable attorney to help them with the lawsuit. Being held liable for your business's debts can be financially devastating, so having legal representation is the best way to protect yourself during one of these lawsuits.

When an LLC Member Can Be Sued Personally

LLC members can be personally sued under specific circumstances, despite the general protection of limited liability:

  1. Piercing the Corporate Veil – If an LLC is undercapitalized, commingles business and personal funds, or fails to follow corporate formalities, courts may hold members personally liable for business debts.
  2. Personal Wrongdoing or Negligence – If an LLC member directly engages in negligent or illegal activity, such as fraud or misrepresentation, they can be held personally responsible.
  3. Direct Involvement in Business Operations – If a member takes active roles in business decisions that lead to financial harm, they may be held accountable in lawsuits.
  4. Member Disputes and Buyouts – If an LLC member breaches fiduciary duties, such as misusing funds or making unauthorized transactions, they may face personal liability.

To protect themselves, LLC members should document their roles, follow business governance rules, and seek legal advice when making major financial decisions.

Frequently Asked Questions

  1. Can an LLC member be personally liable for business debts?
    Yes, members can be personally liable if they sign personal guarantees, engage in fraud, fail to separate business and personal finances, or neglect tax obligations.
  2. What does it mean to pierce the corporate veil in an LLC?
    Piercing the corporate veil occurs when courts hold LLC members personally responsible for company debts due to improper management, fraud, or failure to separate business and personal assets.
  3. How can I avoid personal liability as an LLC member?
    To minimize liability, maintain separate bank accounts, sign contracts properly, follow LLC formalities, and avoid personal guarantees.
  4. What happens if my LLC can’t pay its debts?
    Creditors can pursue the LLC’s assets. If members have provided personal guarantees or committed wrongful acts, they may be personally liable.
  5. Can creditors seize my personal assets for an LLC’s unpaid taxes?
    Yes, unpaid payroll taxes and sales taxes can lead to personal liability for LLC members, especially if they were responsible for financial decisions.

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