What Legal Protection Does a Kentucky LLC Provide for the Owners?

by Jeff Franco J.D./M.A./M.B.A.

If you’re an owner of a Kentucky limited liability company, the most significant legal protection the entity provides you with is limited personal liability for LLC activities -- meaning your personal assets are completely separate from the LLC's. However, this legal protection doesn't extend to every possible situation, and there are times when LLC members may be personally liable for business transactions and other obligations of the LLC.

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Personal Liability Protection

Business owners commonly choose an LLC because of the personal liability protection the entity provides members with. Kentucky LLC owners, or members as they're commonly referred to, are not personally responsible for the debts and obligations of the business -- for example, if the LLC defaults on a loan. This personal liability protection even extends to lawsuit judgments against the LLC for the negligent and wrongful acts of other members. However, the member responsible for such acts can be personally liable. The most that members are at risk for are the contributions they make to the business. For example, if you contribute $50,000 to an LLC in exchange for a membership interest -- $50,000 is the most you can lose since LLC creditors can’t seek payment from your personal assets.

Care and Loyalty

Members of a Kentucky LLC also receive the protection of the duties of care and loyalty that members owe to each other and to the LLC. There isn’t always a way to measure with absolute precision what both duties require of members, but in general, it requires members to put the interests of the LLC first and to exercise ordinary business judgment when representing the LLC and entering into transactions. However, any member whose misconduct is intentional or reckless is responsible to the LLC and its members for any damages that result from the misconduct.

Operating Agreement Protections

One of the more appealing characteristics of a Kentucky LLC is the flexibility members have to draft operating agreements that enhance the legal protections provided to members. Provided the operating agreement doesn’t violate Kentucky law, the document will govern all aspects of the LLC. For example, the law expressly allows the operating agreement to limit, or even eliminate entirely, members’ personal liability for breaching their duties of care and loyalty. In addition, the agreement can indemnify a member who is subject to fines, penalties and lawsuits that arise in the course of conducting business, meaning that the LLC assumes responsibility for these costs.

Unauthorized Acts

Kentucky's LLC laws treat all members as agents of the business who have authority to contract and enter into business transaction on behalf of the LLC without the express consent of other members. In the event a business transaction costs the LLC money or depletes its assets, other members will suffer an economic loss because of it. However, if a member has no agency authority because of restrictions in the LLC operating agreement or enters into a transaction that’s outside the scope of the LLC’s ordinary business, the LLC has no obligation to engage in the transaction. This ultimately protects members’ investments in the LLC from risky transactions that a member might enter into without property authority.