LLC & Ownership Liability

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

The owners, who are known as members, of a limited liability company often choose this business structure because it protects their personal assets that do not relate to the business. However, the members may be personally liable when their actions are outside the scope of the LLC; they are personally liable if they offer creditors personal repayment guarantees or make unauthorized decisions on behalf of the LLC.


A member who joins an LLC is not personally liable for debts and obligations that arise from the LLC’s business activities. This liability protection extends to debts that arise from civil actions against the LLC. The LLC remains solely liable even for debts that result from its failure to observe the formalities relating to the exercise of its management powers. For example, if the LLC defaults on the repayment of a business loan because it becomes insolvent, the members of the LLC are not responsible to use personal assets to satisfy the debt. However, the lender can pursue all business assets that members contribute to the LLC to satisfy the debt. As an LLC member, your liability is limited to the investment you make in the business.


An LLC operating agreement may require members to make periodic contributions to the LLC. Members are personally liable to the LLC and its creditors to make these contributions. The liability remains effective upon a member’s death or disability. If you do not comply with contribution requirements, the LLC can legally pursue your personal assets through a court order. If the LLC obtains credit and the lender relies on future contribution requirements in determining the LLC’s creditworthiness, the creditor can sue you personally to collect the smaller of the outstanding debt or the contribution you neglect to make.

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Improper Distributions

An LLC may not provide any member with a distribution amount that causes the LLC’s liabilities to exceed its assets. If a manager or member of the LLC authorizes such distribution, that person is personally liable to the LLC for the amount that exceeds a proper distribution. Additionally, any member who accepts the distribution knowing that all or part of it is improper remains personally liable to the LLC for the portion that is improper.

Tax Liability

An LLC can elect between sole proprietor, partnership or corporate treatment for federal tax purposes. Individual members of a sole proprietorship or partnership are solely responsible for reporting and paying the tax on their respective portions of the LLC’s profits and losses. The IRS does not have the authority to require one member to pay for the delinquent taxes of another. If the LLC elects corporate tax treatment, the business must file an annual tax return on Form 1120 and pay the appropriate tax on business earnings. If the LLC fails to meet any tax obligation, individual members are not liable for the delinquent amount. However, the IRS can collect outstanding taxes from any and all of the LLC’s assets. As an individual member, your loss is limited to the investment you make in the LLC.

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LLC Liability Limits


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