Limiting Business Liabilities

LLC Limited Liability Exceptions

Limited Liability Corporation? Many experts say it's no less of an oxymoron than "jumbo shrimp". Just because you form an LLC doesn't mean you've limited your personal liability in a bulletproof fashion. If you own or plan to own an LLC, here's what you need to know.

Limited Liability Companies or LLCs are corporate business structures that provide a certain element of protection for owners.

They are often referred to as "Limited Liability Corporations", but that's a misnomer. LLCs are unincorporated entities that are more accurately described as hybrids between corporations and partnerships.

Like sole proprietorships and general partnerships, LLCs are pass-through business entities. That means that income and other aspects of the business pass through to the owners themselves. From a tax perspective, LLCs don't exist independently from their owners.

At the same time, LLCs resemble corporations in the sense that they presumably limit their owners' legal exposure. Rather than being personally liable, owners' assets are safeguarded because the business is responsible for its own legal liabilities.

Or least that's how it works in theory. In reality, LLCs do not completely insulate their owners from the business' legal liabilities. There are several liability exceptions that have been successfully pursued by litigants:

  • Personal negligence. In an LLC, owners continue to be personally liable for their own negligent or illegal activities. If it can be proven that an owner intentionally or even unintentionally committed a gross oversight that led to harm, his personal assets are at risk. This exception also applies to owners who make baseless or exaggerated claims about their products.
  • Contract guarantees. It's very common for owners of LLCs to provide personal guarantees in order to secure a contract with lenders or suppliers. When that happens, the owner voluntarily surrenders his liability protection. Involuntary surrender can also occur when an owner fails to properly identify his role as a representative of the LLC when he signs the contract. LLC owners are advised to consult with their attorneys before they sign any contract documents.
  • Co-mingling. If it can be proved that an LLC owner co-mingled personal and business assets or expenses, the LLC's liability protection will be even more limited. Often described as "piercing the veil", attorneys have used this strategy to demonstrate the practical absence of a personal/business distinction. As a rule, LLC owners should establish and maintain a strict firewall between the company and their personal assets.

Other LLC limited liability exceptions may also exist. Consult your attorney to ensure that your LLC is maximizing its liability protection.

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