Personal Liability in an LLC: Understanding the Factors

Limited Liability Companies (LLCs) are a popular choice for business structures due to the liability protection they offer to their members.

However, there are situations in which members of an LLC can potentially become personally liable for the company's actions, including instances of fraud, unpaid debts, and specific contractual agreements. In this blog post, we'll delve into the factors that determine personal liability in an LLC.

**1. Fraudulent Conduct:**

If your partner within the LLC commits fraud, whether you can be personally liable depends on your awareness of the misconduct. If you are unaware of the fraudulent activities, it's unlikely that you will be held personally liable. However, if you are aware of the fraud or should reasonably be aware of it based on your role in the company, you may be at risk of personal liability. This can be due to a gross negligence theory or your involvement in profiting from illegal activities within the LLC.


**2. Debts of the Business:**

In the absence of fraudulent conduct, the general rule is that LLC members are shielded from personal liability for the business's debts. However, there are exceptions:


– **Personal Guarantee**: If an owner signs a personal guarantee, they become personally liable for the debt if the LLC cannot pay it. This often occurs when an owner agrees to be personally responsible for a loan or debt.

– **Debt Induced by Fraud**: If a debt is incurred through fraudulent or reckless conduct, a court may hold members personally liable. This is often based on the notion that the debt was accrued through deceptive practices or misrepresentations.

– **Co-Mingling of Finances**: Co-mingling personal and company finances or using company funds for personal purposes can jeopardize the limited liability protection of members. A court might determine that the LLC is merely an “alter ego” of the members, and personal assets could be at risk.


**3. S-Corporation Status:**

S-Corporation status is a tax designation and doesn't inherently affect the limited liability protections offered by an LLC. Whether an LLC has S-Corporation status or not, the principles of personal liability remain the same. Courts can still pierce the corporate veil in situations where it's deemed appropriate, regardless of the tax status.


**4. Suing an LLC with No Assets:**

If you're seeking payment from an insolvent LLC, you may explore avenues to pierce the corporate veil and pursue individual members for the debt. Including individual members in your complaint when filing a lawsuit can help you recover the debt from personal assets, especially if the court finds justifiable reasons to do so.


While LLCs are known for their limited liability protections, it's essential to be aware of the circumstances under which personal liability might arise.

Understanding the factors that can make members personally liable, such as fraud, debts, and co-mingling of finances, is crucial for both members and creditors involved with an LLC.

It's advisable to seek legal counsel to navigate these complexities and protect personal assets when engaging in LLC business activities.

Cueto Law Group is located in Miami.
Contact us at 305.777.0377 / www.cuetolawgroup.com / [email protected]

Disclaimer: This article provides general information and does not constitute legal advice. Employers and employees should consult with qualified legal professionals for advice tailored to their specific circumstances and jurisdiction, especially considering the evolving nature of non-compete agreement regulations