Can an LLC Be Sued?

By Joseph Scrofano

Limited liability companies (LLCs) are a relatively modern business structure governed by state laws. Wyoming and Florida first recognized these business entities in the 1970s. As of 2010, all 50 states and the District of Columbia recognize LLCs and have state statutes that govern the creation, management and termination of LLCs. Like corporations, LLCs are separate legal entities that have the ability to sue and be sued.

Separate Legal Entity

State laws treat LLCs as independent legal entities separate from their owners, who are known as members, and managers. LLCs basically receive the same treatment in the court system that corporations receive. Judges create this “legal fiction” to protect shareholders, directors and officers and promote commerce. Along those lines, LLCs may build credit with financial lenders, enter into contracts and sign leases.

Asset Protection

One primary benefit of forming an LLC is that it protects the personal assets of individual members. That means the LLC members cannot be held liable for the debts and other liabilities of the LLC. If a plaintiff successfully sues an LLC and obtains a money judgment against the LLC, the plaintiff generally cannot go after the members’ personal bank account or other assets. In addition, lenders who extend credit to LLCs, generally cannot go after the members to collect the LLC’s debts. The courts refer to this kind of liability protection as the “corporate veil.”

Ready to start your LLC? Start an LLC Online Now

Piercing the Corporate Veil

The liability protections that an LLC provides are not absolute, however. In some cases, courts will use the doctrine of “piercing the corporate veil” to allow plaintiffs to obtain LLC members’ personal assets, typically when LLC members engage in some type of fraudulent behavior. State laws vary from state to state in this respect, but some common factors exist to which many courts look in determining whether to pierce the corporate veil. Courts look at whether one or more member misuse the company’s funds by co-mingling personal and company bank accounts or simply use large amounts of company money for personal use. Courts may also look at the LLC’s capitalization. LLC’s with very little capital and large debts may raise a red flag for some courts. Courts consider piercing the corporate veil if one or more members used the LLC to engage in fraud. Above all, courts typically make this decision based on a highly fact specific examination on a case by case basis.

Service Professionals

Many state laws limit the ability of service professionals to limit their liability by creating an LLC. Service professionals typically include doctors, lawyers, accountants and architects. Some states prohibit these types of business from forming LLCs. Other states require that they form professional limited liability companies (PLLCs), which may have different rules than regular LLCs. In addition, many states allow service professionals to form LLCs or PLLCs, but prohibit the business entity from limiting their liability for professional malpractice.

Ready to start your LLC? Start an LLC Online Now
What Are the Benefits of a S Corp Vs. an LLC?
 

References

Resources

Related articles

Does a Company With an LLC Belong to the Business Owner?

A limited liability company, or LLC, is a business entity organized under state law. LLC owners are called members, and members may or may not be managers who handle the day-to-day operations and make important decisions. Sometimes, due to the internal organization of a company and the nature of operations, the members of an LLC may not be the ones who appear to "own" the business.

Benefits of a Limited Liability Company

Limited liability companies (LLCs) offer several benefits because they share characteristics with several types of business entities. LLCs have similar characteristics to partnerships, corporations and sole proprietorships. Because of these shared characteristics, LLCs offer flexibility on a number of issues important to business owners. While state laws vary for LLCs, the same principal benefits typically apply from state to state.

Difference Between LLC & LLP

An important aspect of starting a business is choosing which type of business entity to create. Two popular business entities are limited liability companies, or LLCs, and limited liability partnerships, or LLPs. Each entity has unique characteristics, but both are also similar in many ways, including the way they are taxed by the IRS.

LLCs, Corporations, Patents, Attorney Help

Related articles

LLC Vs. C Corporation

Limited liability companies and C corporations are both business entities. They are legally distinct entities that are ...

How to Sue an LLC

You can file suit against a limited liability corporation, or LLC, just as you might file suit against an individual ...

Oregon Limited Liability Company Act

Limited Liability Companies, known as LLCs, are business entities that may be taxed like partnerships but limit owners’ ...

Incorporating Vs. LLC

One of the most important initial decisions in starting a business involves deciding what type of business entity your ...

Browse by category
Ready to Begin? GET STARTED