Limited Liability Company Debt Responsibility
Limited liability company debt responsibility belongs to the company alone in most cases but sometimes a member of the company can also be held liable.3 min read updated on February 01, 2023
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 guarantee that 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.
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 singing 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.
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 that 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.
There is an exception to the liability protections afforded to LLC members. When members of the company fail to keep their personal and business endeavors separate, they can 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.
If you need help with limited liability company debt responsibility, you can post your legal need on UpCounsel's marketplace. UpCounsel accepts only the top 5 percent of lawyers to its site. Lawyers on UpCounsel come from law schools such as Harvard Law and Yale Law and average 14 years of legal experience, including work with or on behalf of companies like Google, Menlo Ventures, and Airbnb.