What Financial Liability Does Each Member of an LLC Accrue?

By Elizabeth Rayne

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.

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.

Limited Liability

Like corporation owners (shareholders), with a few exceptions, LLC members are not personally liable for the debts or obligations of the business. If the LLC is sued, only the assets of the company may be acquired by a successful plaintiff. The personal bank accounts and other assets of the LLC members are not subject to litigation, even if an employee or other LLC member is responsible for the lawsuit. Because of the important protection that the LLC creates for its members, you must ensure that you do not lose liability protection by mismanaging the business.

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Investments and Loans

Although LLC members ordinarily are not personally liable for business debts, when forming a new LLC you may take responsibility for some of the startup costs. Each member's financial liability is limited to the investment he has made in the company, meaning that you may lose your initial investment in the business. Additionally, some LLC members personally guarantee loans for the business, particularly if the business is new. In this case, they are personally responsible for repaying the business loan, even if the loan was made for the business. Similarly, if a member authorized a loan on behalf of the business, but was not authorized to do so, the member will instead be liable.

Personal Wrongdoing

Although, in most cases, you would not be personally liable for the wrongdoing of an employee or other member of the LLC, you may be liable for your own personal wrongdoing. For example, if while working you negligently harm a customer, the customer may sue both you and the LLC. In this case, you could be financially liable for the lawsuit that was initiated against you, although you are not responsible for the business's portion of awarded damages.

Mismanagement

In rare cases, a court may find that an LLC has been so mismanaged that the members are personally responsible for the financial liabilities of the business. When a court finds that the members have "pierced the corporate veil," this means the members did not keep their personal affairs separate from the business. For example, if you do not keep an LLC bank account separate from your personal account and treat the LLC money like your personal money, you may lose your liability protection. This may also occur if the business is undercapitalized, meaning it does not have enough money to pay its creditors and other expenses. Additionally, liability may be lost in cases of fraud, as when members misrepresent their financial status to creditors.

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The Asset Protection of a Limited Liability Company

References

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Legal Aspects of an LLC

A limited liability company is a relatively new form of business organization. A hybrid between a corporation and a partnership, LLCs are organized under state law. The laws regarding an LLC vary by state; there is no agreed on set of legal standards. However, there are some consistencies in how an LLC treated regardless of where the business is headquartered.

Benefits of Opening an LLC Company

Choosing a limited liability company as the legal entity for your business may provide benefits not available with other types of entities. Most states throughout the nation adopt similar requirements for creating an LLC. However, you must consider your individual needs and the type of business you will run to ensure that an LLC is the appropriate structure.

If an LLC Is Responsible for Debt, Who Pays if They Cannot?

Operating a business as a limited liability company, or LLC, definitely has advantages over operating it as a sole proprietorship or partnership. The most notable advantage is the limitation on members’ personal liability for the business debts of the LLC. However, there are circumstances in which members may have to pay business debts when the LLC can’t.

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