Can an Owner of an LLC Be Sued Personally?

By Ronna L. DeLoe, Esq.

Can an Owner of an LLC Be Sued Personally?

By Ronna L. DeLoe, Esq.

If you're an owner of a limited liability company (LLC), you're probably counting on the limited liability to protect you if the LLC is sued, as limited liability means limited financial liability. The bottom line is you want to avoid personal liability for paying debts or being involved in lawsuits against the company.

Here's what you need to know about running your LLC so you're shielded from personal financial liability.

How Can You Protect Yourself From Personal Liability?

As an LLC owner, also called a member, there are actions you can take to protect yourself and limit your legal exposure. While this list is not extensive, it does cover some of the more common situations:

  • Don't Personally Guarantee a Loan. If you guarantee a loan to the LLC, you'll be personally liable if the LLC is unable to make payments on it. Find another way to get a loan, or have someone else personally guarantee the loan so you don't have to.
  • Don't Commit Fraud. If the LLC lacks sufficient funds, you're committing fraud if you take out a loan in the LLC's name while knowing the company can't pay it back. In that event, you could be held personally liable for the loan. If, however, one of the other LLC members commits fraud, you aren't liable for the member's fraud unless you knew about it and either did nothing to stop it or encouraged it.
  • Keep the LLC's and Your Bank Accounts Separate. Don't use funds from the LLC for your personal use. Likewise, don't allow the LLC to use your personal accounts. If the accounts are kept separate, you're ensuring that you and the LLC are two distinct individuals and entities. That will limit your liability.
  • Don't Give a Court a Reason to “Pierce the Corporate Veil." Piercing the corporate veil is a legal term meaning that a court can view you and the LLC as one and the same. For example, if you take money from the LLC and deposit it in your personal savings account, a court can pierce the corporate veil to find that you're hiding behind the LLC to avoid personal liability. It the court pierces the corporate veil, you'll be personally liable for debts.
  • Keep Records and Don't Skip Formalities. Make sure you have meetings and that you keep records of the meetings. Keep financial records up to date. Failure to keep required documentation could make you personally liable.
  • Make Sure the LLC Has the Proper Insurance. The LLC should have sufficient insurance to cover liability, property damage, business interruption, and malpractice.
  • Be Careful When Signing a Contract. If you're signing a contract on behalf of the LLC, you must sign it in your capacity as an owner, director, or whatever title you have. Sign as “Widget LLC by John Doe, Director," or something similar. Before you sign the contract, make sure there's no language in the contract making you personally liable no matter how you sign it.

How Can You Be Personally Liable as a Member of an LLC?

If you follow the guidelines above, you can usually avoid personal liability. However, you could be personally liable for claims against the LLC under these circumstances:

  • You Are Negligent. This includes being at fault in a car accident while using a company van or your own car for business purposes. You're liable for the damages you caused to people and property, even if the accident happened during a business activity.
  • You Commit a Reckless or Illegal Act. If you act on behalf of the LLC while committing a reckless or illegal act, you could be held personally liable.
  • You Don't Pay State Sales Tax for the LLC. If you fail to pay the company's sales tax, that burden could then fall on you personally.
  • You Didn't Create the LLC. If you didn't actually file the required paperwork and fees with the state, your company will not be officially recognized, meaning you've left yourself open to personal liability.

You most likely chose an LLC for the liability protection it affords. If you follow the above guidelines, you'll be able to protect your personal financial assets in the majority of business situations.

This portion of the site is for informational purposes only. The content is not legal advice. The statements and opinions are the expression of author, not LegalZoom, and have not been evaluated by LegalZoom for accuracy, completeness, or changes in the law.