If I form an LLC, will my personal assets be protected from liabilities?
The next blog in my series on FAQs for LLCs focuses on personal assets. If you form an LLC, are your personal assets protected from liabilities? Simply because you form an LLC (limited liability company) does not mean your personal assets are safe from any liabilities. First, the protection would be limited to business related liabilities. Second, if you do not treat the LLC properly, an injured party can ‘pierce the veil’ of the LLC to go after your personal assets. Third, there are some instances when personal assets may be attached for business liabilities.
The general rule is that LLC members are not personally liable for the debts of the LLC. Although a member may act on behalf of the LLC, those acts generally do not subject the member to personal liability. Members need to be careful to sign contracts and take actions clearly in the name of the LLC to achieve this result. However, if a member signs a personal guaranty for the actions of the LLC (such as contracts, loans, leases, credit cards, etc.), then that member has agreed to be held personally liability for that limited purpose.
A creditor or plaintiff may ‘pierce the veil’ of the LLC in the event the member does not treat the LLC properly as a business entity. This could happen, for example, if the member pays personal expenses out of the LLC’s bank account or vice versa (commingling personal and business funds). It could also be a result of not following requirements set forth in the LLC operating agreement – so be very careful not to include requirements unless you plan to follow them. Read your operating agreement carefully and make sure it is customized to your situation, then re-read it on occasion to update it as necessary for consistency with your actual practices.
Regardless of how careful you are with your LLC, a member may still be held personally responsible if the member caused the event, or was negligent in hiring or supervising the person who caused the problem. Putting your apartment building in an LLC is a good first step. However, if you are not a licensed electrician and you personally do some shoddy electrical work that results in a fire in the building, anyone damaged by the fire will likely sue both the LLC as the owner of the building and you personally as the person who was negligent. Likewise, if you don’t do the work but hire someone else to do it, but fail to check that they are properly licensed, you may be held responsible for negligent hiring. And if you hire a licensed electrician but you have reason to know he has a drinking problem and let him do the work without supervision anyway, you can be held personally liable for negligence.
Finally, there are some statutory limits to a member’s protections – such as violations of the Environmental Protection Act, failing to pay payroll taxes to the IRS, and other legal violations.
An LLC is good protection but must be combined with adequate insurance and appropriate management.
All blogs on this site are for educational purposes only, do not constitute legal advice or opinion, and should not be applied to your situation, or any specific situation, without consultation with counsel. Strategy Law, LLP does not provide any legal advice concerning any matter discussed in a blog except upon formal engagement including, without limitation, execution of Strategy Law, LLP’s formal legal services agreement, and with respect to specific factual situations. No blog constitutes a guaranty, warranty, or prediction regarding the result of any legal matter discussed in the blog or any representation.
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