The LLC laws of every state have a specific liability limitation provision which basically states that a member or manager shall not be personally liable for business debts, obligations or liabilities merely because he is the owner.

This is a very advantageous benefit because without protection, an individual running a business is completely liable for all business related obligations. However, this law is not a license to be able to unlawful things and hide behind a veil of protection.

So, an individual cannot break the law, commit a fraud or do something unlawful and then claim that he or she was only acting on behalf of a limited liability company.

Another important factor that has caused members of an LLC to be liable is when a member conducts business but never lets the other party know that it is a legal entity and not him personally that is engaging in business activity. It is important to always let the world know that it is an LLC operating the business. You are an agent working on behalf of the LLC business.

This is one example of where members may be held personally liable if actually sued. There are a string of other situations where the protection veil of a limited liability company can be pierced. If you would like to learn more about these other situations and what you can do to avoid them, you should read The Six Step LLC Formula to LLC Protection- an eBook offered by The LLC Expert, LLC.

VIDEO BLOG POST:

Click below to watch a video we recently made that outlines the major benefits of an LLC for operating a small business.  The limited liability company is not the most common choice for small business owners precisely because it was designed to offer them most benefits for small businesses.  Watch Now!

VIDEO LIBRARY

Wondering whether to start an LLC for your new business?

Many think that if the business will only be owned by one person or if the business is going to be small with very little revenue, then the LLC is not required. To the contrary, this is the wrong thinking that has caused many personal liability problems for others.

Listen to this video by Amyli McDaniel which explains how a prospective business owners should assess whether he or she can benefit from the LLC protection afforded by the limited liability company.

Today, a well know legal professor (expert in business organizations law) filed a brief in a landmark Florida case that addresses a fundamental single member LLC matter. If the court agrees with his position, this could mean the definitive end to any charging order protection for the single member LLC.

State LLC laws have never differentiated between a limited liability company that has one member and one that has multiple members when it comes to liability protection.  It is well recognized that every LLC provides a layer of protection stating that owners are not personally liable for business liabilities merely because they are owners.  This is known as forward liability protection.

However, an LLC in most states also offers what is known as reverse liability protection or charging order protection.  This protection basically states that if a member is personally sued for a non-business related obligation and is found liable, the creditors cannot take full ownership of the member’s LLC interest in the LLC.  The creditor’s rights are limited to the economic interests.  In effect, this allows the member to retain the control he had in the LLC business.

The philosophy behind the charging order is not really to give protection to the liable member but to protect other owners of the LLC from business disruption and problems.  They should not fall victim to one member’s personal liabilities by having to deal with an unknown creditor coming in and affecting the business by having management or voting rights.

Now this reasoning does not really apply in a single member LLC context because there are no other members to protect.  A well known bankruptcy court has nullified charging order protection in a single member LLC in the context of a bankruptcy.  While conservative legal practitioners interpreted this ruling to mean there is no longer charging order protection for a single member LLC, the ruling technically applied in only a bankruptcy context.

However, this Florida case addresses the matter in a non-bankruptcy circumstance and so its conclusions will have significant ramifications and applicability in the general area of LLC protection.

More details can be found at this link:

http://www.wmitchell.edu/news/articles/default.asp?articleId=11766&story=Professor-Kleinberger-files-brief-in-landmark-Florida-single-member-LLC-asset-protection-case

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.

Most people know what it means generally, but they may not be aware of how it applies and when it applies or does not apply.

Every state’s LLC laws have a provision that says something similar to this (legalese): “. . . no member, manager, organizer or agent of a limited liability company shall have any personal obligation for any liabilities of a limited liability company . . . solely by reason of being a member, manager, organizer or agent of a limited liability company.”

This is a powerful provision.  It means that the business and its liabilities are separate from its owners.  Without an LLC, if you run a business as a sole proprietorship, you are personally obligated for ALL business debts because the business is a part of you.

Let me give you an example.  If you operate a grocery store business as a sole proprietorship and enter into a contract to purchase inventory, you are personally liable to pay for what is owed under that contract.  If instead, it is a limited liability company that is the business and enters into the contract, it is the LLC and not you personally who is obligated under that contract.

Another example:  If you own that store as a sole proprietorship and someone slips and falls and sues- you and all of your assets will be at risk for that lawsuit.  If it is the LLC that owns and runs the store, it it is the LLC and its assets that are at risk for the lawsuit.

So, given this litigious society where plaintiff lawyers are always looking for targets and people sue for almost everything, the benefits of limited liability protection from a limited liability company are so powerful. . . especially given the low costs to form and ease of maintenance.

Now, this protection is NOT ABSOLUTE.  If you are otherwise personally negligent or at fault due to some actions you personally did, then the limited liability company will not shield you from those actions even if you were working in your business at the time.  For example, if you were delivering groceries to a customer via a company truck and you were at fault in having an accident, you will be held personally responsible for being at fault.  So, having a limited liability company is not the substitute for getting business insurance covering your business and its employees.

There are also other limitations where the law feels like due to circumstances, the business owners should be held personally liable. .  areas like when the owners contractually agrees to be pesonally liable, committing a fraud, using the LLC for improper purposes or to purposely avoid an obligation and piercing the LLC veil.

The liability protection afforded by a limited liability company is powerful and definitely worth the benefits but please know there are some limitations (you can learn more details about them in my Six Step LLC Formula for Limited Liability Protection eBook) and you do need to make sure you properly form, operate and maintain your LLC in order to preserve this important benefit.