Key Takeaways

  • LLCs provide strong protection from personal liability for business debts, but members may still be liable under certain conditions.
  • Personal liability can arise from personal guarantees, direct wrongdoing, or improper separation of personal and business finances.
  • State laws vary, particularly around personal creditors collecting from LLC members’ interests.
  • Single-member LLCs may receive less protection from personal creditors than multi-member LLCs.
  • “Piercing the corporate veil” can expose members to personal liability if the LLC is mismanaged or undercapitalized.
  • Having adequate liability insurance and clear operating procedures helps strengthen LLC protection.
  • You can find a qualified attorney through UpCounsel to assess your LLC personal liability exposure.

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 Your Own Actions

Even though an LLC protects members from the actions of others, it does not shield members from liability for their own misconduct. LLC owners can be held personally liable if they:

  • Commit negligent or wrongful acts in the course of business
  • Personally guarantee a business obligation
  • Fail to remit employee taxes or engage in tax fraud
  • Engage in fraud or reckless misconduct
  • Treat the LLC’s assets as their own (commingling funds, paying personal bills with company accounts)

In these situations, courts may disregard the LLC’s separate status and hold the member liable—a legal concept known as “piercing the corporate veil.” Liability insurance can help mitigate these risks, but following corporate formalities and maintaining clear financial separation is also essential.

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.

LLC Liability for Members’ Personal Debts

Generally, creditors of individual LLC members cannot go after the LLC’s assets to satisfy personal debts of the member. However, they may seek a charging order, which entitles them to receive the debtor-member’s distributions from the LLC without granting management rights.

Additional creditor remedies vary by state and can include:

  • Charging orders – The most common remedy, allowing creditors to intercept distributions to the member.
  • Foreclosure on the member’s interest – In some states, creditors can foreclose and become the new financial rights holder.
  • Judicial dissolution – In rare cases, a court may order the LLC dissolved to pay a member’s personal debts.

Some states, especially those friendly to asset protection like Wyoming or Nevada, limit remedies to charging orders only. Business owners should consider state laws when forming an LLC if personal asset protection is a priority.

Limited Protection for Single-Member LLCs

Single-member LLCs do not always receive the same level of protection as multi-member LLCs. Courts in certain jurisdictions have ruled that creditors can pursue additional remedies beyond charging orders for single-member LLCs, including seizing membership interests or ordering dissolution.

This is because the rationale for limited creditor remedies—to protect other uninvolved members—doesn’t apply in a single-member setup. For enhanced asset protection, single-member LLC owners should:

  • Keep personal and business finances completely separate
  • Maintain detailed and consistent operating records
  • Avoid treating the LLC as a personal piggy bank
  • Consider forming the LLC in a state with strong charging order protections

When Courts Can Pierce the Corporate Veil

“Piercing the corporate veil” is a legal doctrine allowing courts to hold LLC members personally liable despite the LLC’s limited liability shield. This typically occurs when the LLC is misused or inadequately maintained. Common reasons for veil-piercing include:

  • Failing to adequately capitalize the LLC
  • Using the LLC to commit fraud or deceit
  • Commingling personal and business finances
  • Lack of proper records or failure to follow LLC formalities
  • Treating the LLC as an “alter ego”

To avoid personal liability, LLC owners must operate the business professionally and respect its separate legal status. Courts generally favor upholding the LLC’s protection—but only if members demonstrate responsible business practices.

Strategies to Strengthen LLC Liability Protection

LLC members can take proactive steps to minimize the risk of personal liability:

  • Draft a detailed operating agreement outlining management structure, member responsibilities, and dispute resolution.
  • Maintain separate bank accounts and avoid personal use of business funds.
  • Hold regular member meetings and document key decisions.
  • Purchase liability insurance to cover potential claims not shielded by LLC status.
  • Avoid personal guarantees when possible—negotiate business credit in the LLC’s name alone.
  • Consult a qualified attorney to assess ongoing compliance and mitigate risk.

Following these best practices helps reinforce the LLC’s limited liability structure and reduces the likelihood of personal financial exposure.

Frequently Asked Questions

Can I be personally liable if my LLC is sued? You are generally not personally liable, but you may be if you personally acted negligently, committed fraud, or signed a personal guarantee.

What is a charging order? A charging order allows a creditor to collect distributions from an LLC member without gaining control or ownership of the business.

How do I avoid piercing the corporate veil? Keep personal and business finances separate, follow LLC formalities, maintain good records, and avoid fraudulent conduct.

Do single-member LLCs have less protection? In some states, yes. Single-member LLCs may not benefit from charging order protections and could face stronger creditor remedies.

Should I get liability insurance if I have an LLC? Yes. Liability insurance provides additional protection for situations where LLC status does not shield you, such as personal negligence or lawsuits exceeding the company’s assets.

If you need help with LLC member liability, you can post your job 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.