Limited Liability and Protection from Debts
When you set up an LLC, the LLC is a distinct legal entity. Generally, creditors can go after only the assets of the LLC, not the assets of its individual owners or members. Typically, a corporate officer isn’t held personally liable. There are multiple state laws that say members of an LLC have no automatic or implied financial liability because they’re a member. When creating an LLC, just the limited liability corporation is responsible for liabilities or debts incurred by the business, not the managers or owners.
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 most cases, members are not liable for the LLC’s debts unless they have cosigned or personally guaranteed the debt. One purpose of organizing an LLC is to separate the personal and business assets and obligations of the business owner. The members of the LLC have limited liability for debts, obligations, and liabilities of the business.
Tax Considerations for LLC Members
- A single-member LLC is taxed as a sole proprietorship.
- A multiple-member LLC is taxed as a partnership.
Personal Negligence and Wrongdoing
LLCs do not protect their members from their own negligence or personal wrongdoing. Similarly, you can still be sued for damages related to your business activities and may be held liable for the debt of an LLC if you personally guarantee it. Forming an LLC provides limited liability protection, safeguarding personal assets from the actions of other LLC members. However, this protection is not extended to personal funds commingled with business funds, as that could potentially undermine the separation between personal and business finances.
Can LLC Members Be Held Personally Liable?
Although LLC owners are generally protected from personal liability for business debts and claims, there are circumstances under which an LLC member can be personally liable. These include:
- Personal and direct injury to someone during the course of business due to negligence
- Any criminal action or intentional actions outside the scope of authority
- Instances of fraud, unpaid debts, and specific contractual agreements where the member is responsible
State laws provide some level of personal liability protection depending on where the LLC is formed, with states like Texas offering stronger protections than others. It’s important to understand the legal framework in your state and consult legal counsel if you’re unsure about potential personal liability issues as an LLC member.