The “LL” in LLC

Like corporations, LLCs provide the owners of a business enterprise with the benefits of “limited liability.” This means that generally the liability of owners of a LLC for the debts and obligations of the business will be limited to the owners’ investment or contribution to the LLC.

However, as is this the case with corporations, there are circumstances where courts may “pierce the corporate veil” of an LLC and hold the owners or members accountable for the debts and obligations of the business.

The three most common situations where courts may hold LLC owners or members liable for these additional debts and obligations occur when:

  • The owners “under-capitalize” the company (e.g., the owners cause the business to take on debts that they know can’t be repaid or performed).
  • The company acts as an “alter ego” of the owners by either co-mingling personal and business assets or obligations or by failing to follow proper corporate or LLC formalities.
  • The owners use the company to commit fraud on a third party.

Accordingly, in setting up either a corporation or an LLC, it’s important that the owners capitalize the business with sufficient assets to pay or perform all known or reasonably anticipated liabilities and obligations, not co-mingle business and personal assets and obligations and comply with proper corporate formalities (e.g., hold periodic board meetings, take minutes, etc.). Otherwise, the owners may find themselves responsible for the liabilities and obligations of the business despite having formed as an LLC.

Owners of an LLC should also understand that the concept of “limited liability” will not protect them from business obligations they incur individually, such as by guaranteeing the loan or credit card obligations of the business, since these are  contractual liabilities owed directly to bank or credit provider.

For more on LLCs, check out “The Top 6 Things You Should Know About LLCs” and stay tuned for more posts in the coming weeks.    

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