Personal Liability LLC

Personal liability LLC doesn’t generally exist, as all LLC owners (also referred to as members) are protected against personal liability from the company’s debts and obligations. This means that if a lawsuit is brought against the LLC, the plaintiff cannot legally take any assets of the LLC owner(s), i.e., home, car, investment, bank account funds, etc. Therefore, the LLC owner will lose only what he or she invested in the company. With that said, there are some exceptions to this rule, particularly if an LLC member acts illegally or engages in fraud.

Personal Liability Protection Exceptions

While limited liability protection is one of the greatest benefits of an LLC, there are some exceptions to this general rule. If any of the following circumstances exist, an LLC owner might not have such liability protection:

  • If the member personally injures someone else, even if done so accidentally
  • If the member personally guarantees a loan, indicating that if the LLC fails to repay, he or she will repay
  • If the member fails to pay taxes on his or her portion of the LLC profits
  • If the member engages in fraudulent actions
  • If the member acts recklessly or otherwise does something illegal that causes harm to the business or a third party, i.e., borrowing money that cannot be paid back
  • If the member treats the business as an extension of him or herself rather than a separate and distinct legal business

Keep in mind that, for the last item in this list, all LLC owners must not treat the business as an extension of themselves. This could occur if the member mixes business and personal assets or otherwise causes others to believe as though the business is not formally organized but rather operates as an extension of the member. This also occurs when an owner ignores legal formalities required of an LLC, i.e., ongoing maintenance and fees. If this occurs, the court might determine that the business is not actually a formal LLC but rather an extension of the owner.

Furthermore, if the owner acts recklessly in that he or she borrows money that cannot be paid back or engages in business deals knowing that the business is unable to pay the invoices, the court could actually render this financial fraud and determine that the owner will be held personally liable.

In order to prevent any of the above circumstances from occurring, the LLC should obtain a liability insurance policy that can assist in preventing creditors or other plaintiffs from going after your personal assets. For example, if you own and operate your own massage business and inadvertently injure someone while performing a massage, then your liability insurance will cover you in the event that the client brings a lawsuit.

Liability insurance can also protect the LLC’s assets in the event of a lawsuit. But if the lawsuit is brought due to breach of contract for failure to pay, or failure to pay other bills, then such liability insurance will no be covered.

Piercing the Corporate Veil

As previously noted, there are many ways in which an LLC member might be personally liable. Thisis referred to as piercing the corporate veil. But even when a company has to shut its doors due to lack of financial stability, a court might require the owners to pay business debts in some circumstances. This could occur if the creditor can show that the LLC was a shell company simply organized to provide liability protection for its owners or that the company was an extension of the owner(s).

If this does in fact occur, the plaintiffs can go over the owner’s personal assets, which means that the owner might be at risk of losing his or her home, car, investments, and other assets.

Keep in mind that if the veil has been pierced due to fraudulent actions, the court will hold only those owners who engaged in the fraudulent act liable. Therefore, innocent members are not at risk of being held personally liable. However, if the court determines that all LLC members engaged in the circumstance that caused the veil to be pierced, then all members could,in fact, be held personally liable.

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