LLC Answers

CAN I FORM AN LLC TO GET RID OF EXISTING PERSONAL LIABILITY?

I get inquiries almost daily from people who are dealing with a current problem or lawsuit and they want to know if there is a way for creating an LLC at that point and use the LLC to somehow avoid being liable for the potential liability or lawsuit in question.

The answer to this is always “NO.”  An LLC only exists from the point it is created.  So, if you were to form an LLC today, it did not exist with respect to any business or other activity that took place before today.  While one can transfer liabilities to the LLC and have it be responsible, the transfer does not alleviate the person from being personally liable if he or she was liable in the first place. You cannot get rid of any personal liability by using a limited liability company.

In addition, even if your business was in an LLC, there are some personal liabilities that LLC protection does not reach.  These include those in which you personally agreed to be liable for (such as a loan guaranty or a guaranty to a lease agreement)  or your own negligent acts.  You can never act negligent or in aways that are unlawful and be able to hide behind an LLC.  The law will hold you personally responsible for your own tortious acts.

But aside from the limitations, creating an LLC for your legitimate business activity is always a good idea and sometimes it takes a lawsuit or dispute to open your eyes to these issues.

For example, I had a client once who owned investment property in his own name.  He and his tenant had a dispute about what rent was owed and other issues, and he was personally liable to address all this.  Given that there was a lawsuit in his own name, he had to disclose this in his credit applications and reports and it affected his personal and business life.

While he could not avoid the personal liability for this one tenant and the tine period to date, he could avoid similar issues for future periods by forming a limited liability company and transferring his investment properties into an LLC and his contracts into the LLC name.  Then moving forward, he should have his limited liability company be the business party to his leases and vendor agreements.

It is never too late to minimize future liability potential by forming an LLC using the limited liablity company for your business, but the limited liability company cannot be used to get rid of existing personal liability and it can never be used as an instrument to avoid being liable for misconduct, fraudulent, negligent and unlawful acts you engage in.