Who Is Liable in an LLC?

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

All jurisdictions within the United States allow business owners to create a limited liability company structure. The most common reason for creating an LLC is for owners to obtain the benefit of limited personal liability. However, the formation of an LLC does not provide owners, who are called members, with an unrestrictive license to avoid personal liability for all activity. Limits on liability are only available for activities within the scope of ordinary business practices.

All jurisdictions within the United States allow business owners to create a limited liability company structure. The most common reason for creating an LLC is for owners to obtain the benefit of limited personal liability. However, the formation of an LLC does not provide owners, who are called members, with an unrestrictive license to avoid personal liability for all activity. Limits on liability are only available for activities within the scope of ordinary business practices.

Agency Power

Limited liability companies that are managed by the members are bound by all contracts into which members enter on behalf of the LLC in the normal course of business. Some LLCs hire non-member managers to run the daily operations of the business. If the LLC is run by non-member managers, the business is liable only for contracts into which the managers have authority to enter. However, in either case, the LLC is not responsible for contracts into which a member or manager has no authority to enter, or that are outside the scope of the LLC’s business. The operating agreement may provide more restrictive authority for members and managers to impose a contract obligation on the LLC.

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Apparent Authority

Members and managers of the LLC do not have unlimited authority to enter into contracts. In situations where a third party enters into a contract with a member or manager who appears to have authority, the LLC is not liable for fulfilling the contract if the third party has notice that the LLC representative has no actual authority. States will find there to be proper notice if the limits on authority are included in the certificate of organization or where the third party previously receives direct notification of the restrictions included in the operating agreement.

Manager Liability

Member and non-member managers are not personally liable for any debt or other obligation of the LLC. However, a member-manager may incur personal liability for acting outside the scope of authority and when engaging in activity that may cause injury to the LLC or a third party. For example, if during the course of conducting LLC business, a member-manager is grossly negligent, such as driving a company vehicle under the influence of alcohol, the manager is personally liable for any damage he causes to the vehicle and third parties.

Manager Indemnification

Most jurisdictions limit the personal liability of both member and non-member managers when acting within the scope of their authority in a reasonable manner. In the event a manager incurs out-of-pocket expenses or liabilities in the course of conducting LLC business, the LLC must reimburse and indemnify the manager. The LLC may purchase insurance to cover any potential losses a manager may incur. The purchase of indemnification insurance is allowable even if the operating agreement does not allow for the elimination of manager personal liability.

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References

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