LLC Liability Limits

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

A limited liability company business structure reduces the amount of business debts and obligations for which individual members are personally liable. However, this type of entity does not protect members who intentionally use the business to merely create a barrier to personal creditors with no bona fide business activity or use the structure to further criminal endeavors.

Member Liability

Members of an LLC enjoy limitations on personal liability for activities within the scope of the LLC’s business. Most state law safeguard a member’s personal assets from any debt or obligation that results solely from the LLC’s business. This includes any potential civil judgment liability that may arise during the normal course of business. The limitation on personal liability extends to obligations that arise from the LLC’s failure to observe particular formalities that relate to the exercise of management or power. However, members who act beyond the scope of the LLC, such as personally guaranteeing the debt of the LLC, are responsible for any debt or obligation that arises.

Contribution Liability

Most jurisdictions do not require a member to contribute property or money as a condition to becoming a member. However, if the operating agreement or preexisting members require future contributions to join the LLC, you are legally responsible for making those contributions. The LLC has all rights the state affords to other creditors. Additionally, if the LLC obtains financing and the lender relies on future member contributions in making a determination of creditworthiness, you may be personally liable to the creditor for any amount the LLC defaults on the loan as a result of your failure to make the contribution.

Ready to start your LLC? Start an LLC Online Now

Improper Distribution Liability

State laws do not dictate allowable minimum or maximum distributions; however, they do preclude LLCs from making distributions that hinder its ability to pay debts as they come due in the ordinary course of business or cause total liabilities to exceed assets. In the event of an improper distribution, the manager or member responsible for authorizing the distribution is personally liable to the LLC for improper amounts. However, if the receiving member accepts the distribution with full knowledge that all or part of the distribution is excessive, that member is jointly liable with the paying member or manager.

Fiduciary Duties

Both member and non-member managers are personally liable for breaches of fiduciary duties for the amount of damage to the LLC the breach causes. Managers and members owe a duty of due care to the business that requires they not act in a grossly negligent manner that can potentially injure the LLC. Gross negligence requires a flagrant, intentional or reckless disregard for the law and reasonable business practices. A duty of loyalty requires the members and managers to solely conduct business activities in a way that puts the interest of the LLC before any other interest. Common occurrences of loyalty breaches include managers using LLC business contacts or relationships for personal gain, or directly competing with the LLC through a separate venture.

Ready to start your LLC? Start an LLC Online Now
LLC & Ownership Liability
 

References

Related articles

Is a Power of Attorney Liable for Debts?

When you assign a power of attorney, you, as the principal, authorize another person to serve as your agent to make financial transactions on your behalf. Under normal circumstances, establishing a power of attorney does not create personal liability for the agent, but consult with an attorney who specializes in matters related to powers of attorney with questions about your particular circumstances.

LLC Member Rights

Most jurisdictions throughout the United States establish similar minimum rights that LLC members retain by virtue of their membership in the business. However, these same jurisdictions provide the LLC with great flexibility to enhance or restrict those rights in an operating agreement drafted by the LLC's members.

What Is the Structure of an LLC?

State law dictates how you can form a limited liability company business entity and the structure it must maintain to retain its LLC status. Most jurisdictions throughout the nation have similar structure requirements. However, for federal tax purposes, the IRS allows an LLC to elect the tax treatment of a corporation.

LLCs, Corporations, Patents, Attorney Help

Related articles

Who Is Liable in an LLC?

All jurisdictions within the United States allow business owners to create a limited liability company structure. The ...

Does LLC Mean Incorporated?

A limited liability company is a legal business entity similar to a corporation. Although formation requirements are ...

How Does an LLC Work?

The state in which you create your limited liability company will impose minimum requirements and standards you must ...

What Are the Legal Responsibilities of Limited Liability Companies?

One of the principal reasons entrepreneurs choose the limited liability company structure for a business is the ...

Browse by category
Ready to Begin? GET STARTED