Can an Owner of an LLC Be Sued Personally?

By John Cromwell

When starting a business, a major concern is what the owners’ personal liability will be. Owners are concerned that if their business makes a mistake, not only could they lose their investment, but they could lose their home and other personal assets. Some business organizations, such as sole proprietorships, offer no liability protection; if the business lacks the funds to settle a debt, the owner must make up the difference. Generally a limited liability company (LLC) is different; the owner is not personally liable for the business’ obligations and therefore cannot be sued for the business’ actions. However, there are some situations where the owner of an LLC can be sued personally for the LLC’s actions.

When starting a business, a major concern is what the owners’ personal liability will be. Owners are concerned that if their business makes a mistake, not only could they lose their investment, but they could lose their home and other personal assets. Some business organizations, such as sole proprietorships, offer no liability protection; if the business lacks the funds to settle a debt, the owner must make up the difference. Generally a limited liability company (LLC) is different; the owner is not personally liable for the business’ obligations and therefore cannot be sued for the business’ actions. However, there are some situations where the owner of an LLC can be sued personally for the LLC’s actions.

LLC Generally

To qualify as an LLC, the owners of the business must file organization documents with the state where the business is located. If the state grants the business LLC status, the business becomes a separate legal entity from the owners. This means that in any lawsuit the business can be named as a defendant. The owners can work for the LLC and receive distribution of funds from the business. An LLC generally has fewer managerial formalities than a corporation, which can also protect its owners from being personally liable for its obligations.

Ready to start your LLC? Start an LLC Online Now

Piercing the Veil

If the LLC acts as a “veil” protecting the LLC’s owners from the business’s liabilities, a court may “pierce the veil” and allow an owner to be named as a party to a lawsuit in certain circumstances. The court will pierce the veil when the LLC is being used to do something illegal or if there is no real distinction between the owners and the LLC. So if an owner commits fraud while acting as an officer for the LLC and then seeks to use the liability shield to protect himself from being personally liable, a court will generally not permit that. This issue also arises if the owner interacts with someone on behalf of the LLC but does not make that clear to the third party; if the third party brings suit related to that interaction, the owner can be named as a defendant.

Protecting Against Piercing

An owner can take several steps to prevent being sued for the LLC's actions. The first and most obvious step is to not participate in any fraud or illegal activity. In addition, an owner should be clear when he is acting on the LLC’s behalf by referencing the business numerous times during any dealings with a third party. Financially speaking, the business and its owners should maintain separate financial accounts and records and never co-mingle funds. If there are any distributions from the business to the owner, it should be clearly recorded in both the LLC’s and owners’ personal records. Finally, when organizing the LLC, the owners should ensure that the business is properly capitalized. This means that the LLC’s assets and income must be sufficient to pay the debts and obligations it expects to incur.

Cosigning Loans

Another example of when an owner can be sued personally for a business obligation is if the owner personally cosigns a business loan. As a cosigner, the owner would share liability for paying off the debt, and therefore could be named as a defendant in any suit by the lender to obtain what is owed.

Ready to start your LLC? Start an LLC Online Now
Does Filing a Business Bankruptcy Take One's Home?

References

Related articles

What Is Important in an LLC?

A limited liability company is a relatively new type of business organization. Introduced more than 30 years ago, the LLC was meant to combine the best attributes of partnerships and corporations. It is important to know that while LLCs share common characteristics, these organizations are regulated by state law. This means that some elements of an LLC may vary from state to state, such as the process for becoming an LLC.

What Financial Liability Does Each Member of an LLC Accrue?

Limited liability companies play a valuable role in today's business world and are a common alternative to corporations. LLCs must be organized under state law and exist independently of the members. Owners of this type of business structure are generally free from personal liability for company debts beyond the loss of any investments. However, the shield is not absolute, and owners can be responsible if a business debt was personally guaranteed or any fraud or commingling of assets occurred.

What Is the Difference in an LLC & Owner/Proprietor?

Limited liability companies, or LLCs, and sole proprietorships are two different forms of business. For a new owner starting a business, the choice of form is a very important decision. People thinking about creating a business should seek professional advice.

LLCs, Corporations, Patents, Attorney Help

Related articles

LLC Liability Protection

A limited liability company, or LLC, is a type of business entity that differs from a corporation or partnership in ...

Ways to Protect a Sole Proprietor From Being Sued

It is especially important for sole proprietors to avoid lawsuits because they are personally liable to pay for all of ...

Liability After the Selling of a Sole Proprietorship

Business owners often sell a business and expect to be rid of future obligations. However, due to the unique position ...

Legal Aspects of an LLC

A limited liability company is a relatively new form of business organization. A hybrid between a corporation and a ...

Browse by category