Owners of a limited liability company (LLC are called members, and they generally have two types of liability: member liability and non-member liability.
Who is liable in an LLC depends on the type of business entity you form, your state's laws, and whether you signed any agreements limiting your liabilities.
The concept of liability in an LLC can be a confusing one. The liability for a limited liability company depends on the circumstances.
However, generally speaking, members and managers can still be liable for debts incurred by the LLCs they own or manage in some instances.
What Is Limited Liability?
LLC owners are individuals or business entities that own interests or shares in an LLC.
The business owners are not personally liable for any debts, obligations, and liabilities incurred by the LLC; instead, such liability is limited to their investment (ownership) in the company.
The business assets and liabilities are owned by the LLC and not transferred to its members.
An LLC protects members' personal assets from business judgments, including wrongful acts or misconduct committed in their business activities.
However, this protection only applies if the owners comply with state regulations for operating an LLC. In addition, there may be special rules for LLCs that a single member owns.
As an owner of the business, you have limited liability if your company is sued or fails financially.
You can lose only what you invest in it plus any additional debt beyond your investment.
Personal assets such as cars and homes cannot be taken from you to cover debts of the business even if they are co-owned with members of your LLC.
What Protection LLC Offers?
Limited liability protection means personal assets are protected from the company's debts and liabilities. This means that if an LLC fails to pay a debt, its owner's personal assets may be safe.
The most popular type of personal liability protection for owners is personal, limited liability protection which limits personal asset exposure to debts and claims against the company.
LLC's debts are usually not personal debts of its owners.
Suppose an owner is personally liable for the company's debt. In that case, it means that they are financially responsible for paying off any creditor or claimant who successfully sues them for monetary damages.
The LLC itself would be legally obligated to pay creditors and claimants instead of individual members/owners (unless the LLC member agrees otherwise in the operating agreement).
Members of an LLC are not held responsible for the personal actions of other members or employees.
This means that personal assets are not at risk if someone is injured during a business activity unless they were personally negligent in some way.
Members cannot be held responsible for LLC debts with their personal property (unless used to secure the debt). Asset protection is a common reason business owners choose to form LLCs.
What Protection Can’t LLC Offer?
Although limited liability companies generally protect their LLC members/owners from liability risks, you can be held personally liable for the following:
- If you promise or personally guarantee by yourself or other people to obtain financing or credit for your business, such as LLC business loans;
- Actions that arise out of an individual owner's negligence in managing their role within the LLC may not protect its owner from being held personally responsible for a negligent act that results in injury or damages to another person.
- The LLC can be sued in place of its owner when personal injury or property damage occurs because the business failed to maintain adequate insurance coverage for accidents that may occur while conducting business operations.
- You may also be held personally liable if you engage in fraudulent activities, such as making false promises to get investors or deceiving LLC's creditors, if your company does not meet the requirements of its business purpose.
- If you do not properly manage your LLC's finances and activities, such as using company funds for personal use or having no personal bank accounts (piercing the corporate veil).
- If any legal issues arise in connection with a lawsuit or other action against the LLC owner personally (as opposed to his/her interest in the limited liability company), it is important that an attorney familiar with the state law be consulted.
- The LLC's owner can also be held personally liable for violating anti-discrimination and other employment regulations after transferring operations to a new employee who subsequently violates these rules if the company fails to take action once it is made aware of its violation.
Does LLC Include Liability Insurance?
The majority of limited liability entities choose the business insurance that can cover the most prominent risks.
General liability insurance is for businesses that operate in public. Business owners can purchase commercial insurance to protect their organizations against LLC's liability claims.
What Happens to Debt When LLC Is Dissolved?
LLC's members are not liable for any debts if the LLC has been voluntarily dissolved and for any debts that the LLC had incurred before it was dissolved.
The LLC's money is used to settle any debts, but it has to be distributed to potential creditors before the members can split the remaining assets into their personal funds.
The dissolution needs to follow the state laws, which might differ from state to state.
Does a Single-Member LLC Provide Liability Protection?
Single-member LLCs protect their owners against personal liability in most cases, except when the owner is personally responsible for physical damage or harm to a third party.
Are LLC Members Liable for Tax Debts?
They can be. If you have unsettled tax obligations (for example, you failed to file your individual tax returns), the Internal Revenue Service can go after the company's assets to settle this.
Corporate formalities differ from sole proprietorships and partnerships, so you must seek legal advice if you have questions about the business debts.
Is an LLC Protected From Personal Judgment?
If your company is sued, the only assets seized are the funds in the business bank account or the business real estate.
Your personal affairs and the ownership of your personal assets and accounts are generally not part of an LLC's legal problems.
Are LLC Members Protected From Co-owners Liabilities?
LLC co-owners are separated from the wrongdoing of the LLC owner and vice versa.
The only thing at stake is the assets of the LLC, which are used as .compensation for the damage.
A member of the LLC has to remain personally liable for the alleged wrongdoing unless other group members participated in the misconduct.
Does LLC Protect Against Lawsuits?
It depends. An LLC offers legal protection as long as the owner pays close attention to formalities when forming an LLC, doesn't use a personal bank account for the LLC transactions, doesn't personally guarantee a business loan, doesn't commit reckless or illegal activities, and doesn't pay taxes, especially the sales tax, which can affect the owner personally.
Does LLC Protect a Sole Proprietor?
Small businesses can be operated as single-member LLCs, allowing the LLC members to avoid using their personal assets to pay for business debts (much like sole proprietorships).
That means this LLC structure is the best option for many businesses.
LLCs and Limited Liability Protection...
To overcome liability risks, you need to be careful when setting up your LLC, regardless of its type.
Running a business as an independent entity with separate bank accounts, buying suitable insurance, and exploring trust options are the pivotal points in protecting your personal liability from any potential risks that might arise in the future.
If you are new to the LLC world, it's best to seek legal advice from a professional.