Personal Liability of LLC Members

LLC stands for "limited liability company". I am often asked by those forming LLCs, how much protection do I get from an LLC for my personal assets? Section 303 of the Uniform Limited Liability Company Act (upon which all state LLC acts are based) reads, in pertinent part, as follows:

(a) [T]he debts, obligations, and liabilities of a limited liability company, whether arising in contract, tort, or otherwise, are solely the debts, obligations, and liabilities of the company. A member or manager is not personally liable for a debt, obligation, or liability of the company solely by reason of being or acting as a member or manager.
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(c) All or specified members of a limited liability company are liable in their capacity as members for all or specified debts, obligations, or liabilities of the company if:
     (1) a provision to that effect is contained in the articles of organization; and
     (2) a member so liable has consented in writing to the adoption of the provision or to be bound by the provision.

Bottom line: an LLC member has no personal liability for LLC debts unless "a member so liable has consented in writing to the adoption of the provision or to be bound by the provision."

But here's the rub: an entrepreneur starting a new business is universally required to guaranty everything to get credit for the new LLC--suppliers, utilities, commercial real estate lease, bank loan, etc. What about the credit card offer that is sure to come in the mail a few months after you open an LLC bank account? On its face, the credit card offer appears in the name of the business but you the owner invariably guaranty the account (check the fine print on the back of the offer). So if the owners of a new LLC are required to guaranty every element of credit, is the promise of limited protection just an illusion? No, I think not. As the new LLC gains its legs over years of operation, suppliers and other will begin to offer credit terms to the LLC without guaranty based upon the LLC's own credit history. Secondly, above we have been discussing contractual liability for loans.

But businesses also face tort liability for such things as personal injury claims. Let's say your LLC runs a coffee shop and an elderly female patron falls breaking her hip. The hip surgery goes poorly causing the old woman to spend months in the hospital. The hospital bills and claimed pain and suffering in the suit brought by the patron against the coffee shop exceed its liability insurance coverage. This is the type of liability situation that the LLC form of business affords protection to business owners regardless of personal guaranty. What if you are one-person computer programming consulting operating out of your house? Where tort liability exposure is low, the incentives for the small business owner to utilize the LLC structure diminish for asset protect purposes. There may be tax reasons for forming an LLC even in a low tort business but please consult your tax account for insight on that issue.