LLC Member Liability: Everything You Need to Know
Knowing about LLC member liability is important when running a business. Here is everything businesses need to know to protect themselves and their employees from being liable.3 min read
Knowing about LLC member liability is important when running a business. Here is everything businesses need to know to protect themselves and their employees from being liable.
What is a Limited Liability Company?
Limited liability companies have an important role in the business world today. They're a popular alternative to corporations. LLCs are required to exist separately from the members and need to be organized under state laws. Members of a limited liability company have protection from business debts and personal liability, similar to a corporation.
However, a corporation pays its own taxes, while a limited liability corporation is considered a pass-through tax entity. This means any profits or losses from the business go to the owners, who are in charge of reporting them on their individual tax returns. This is similar to a sole proprietorship or partnership. It's more challenging to set up a limited liability corporation than a sole proprietorship or partnership, but running one is much easier than trying to run a corporation.
What Type of Liability Protection Do You Get With an LLC?
The most common reason people decide to form LLCs is not to be personally liable for any debts of the business they're involved in or own. Creating the LLC correctly under state law give its members legal protection. The members are not normally liable for lawsuit judgments against the LLC or contracts that the LLC enters into.
There are multiple state laws that say members of an LLC have no automatic or implied financial liability because they're a member. When creating an LLC, just the limited liability corporation is responsible for liabilities or debts incurred by the business, not the managers or owners. The limited liability that an LLC has isn't perfect and may vary depending on what state the LLC is formed in.
Before creating a limited liability company, look at the possible liability risks the business might have and what protection an LLC will provide. More specifically, look at the liability risks that come with being an LLC owner. These include:
- Personal liability for a member's actions in relation to the business.
- Personal liability for actions taken by employees or co-owners in the business.
- The LLC's liability in relation to other members' debts.
- Personal liability for the LLC's debts
Personal Liability for Your LLC's Debts
The LLC's creditors may go after the bank accounts of the LLC as well as other property. However, they can't go after the owners' personal cars, accounts, homes, or property.
Most creditors don't want to be in charge if the business goes under, so they'll require that the owners personally guarantee any credit cards, business loans, and extensions of credit. In that case, the members would be personally liable in case the assets fall short. State laws normally protect all LLC members from any personal financial liability when it comes to the limited liability corporation.
However, the members can choose to contract around the protection the state law gives them. For example, if a member decides to sign a personal guarantee that's related to an LLC loan, lease, or contractual obligation, they'll be in charge of the personal financial liability for that obligation. Personal obligations replace the state law, which means the corporate protection veil is removed regarding that specific contractual obligation.
Personal Liability for Actions by LLC Co-Owners and Employees
When a company has an LLC, its owners are protected from being personally liable for any wrongdoing that the employees or co-owners of the LLC commit during the operation of the business. If the LLC is found liable for the wrongdoing or negligence of the employee or owner, the LLC's money can be taken in a judgment against the company. However, the owners won't be personally liable for the debt.
An employee may be personally liable for his actions, but an LLC co-owner who wasn't involved wouldn't be. For example, if an employee runs over someone during a delivery, and that person dies, the company can be found liable if the employee was found to be drunk at the time. The company's money and assets would be used to pay a judgment if a lawsuit ensues, but the LLC co-owner's personal assets wouldn't be.
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