A limited liability company (LLC) does just that; it limits the liability of the business’s owners. This means that with limited exceptions, liability for the actions of the LLC can only be satisfied from the assets of the LLC. Personal holdings and assets of the individual owners and officers are protected so long as the LLC is properly formed and in good standing.
If the LLC is not properly formed or in good standing, then the debts and obligations of LLCs can result in real life problems for their members. Creditors can pierce the liability shield and go after personal assets if business owners are not careful. In addition to piercing the liability shield, there are several other instances when LLC owners may be held liable for the company’s obligations.
Lenders often require an owner of an LLC to sign a personal guarantee to secure repayment of a loan to the LLC. In this instance, the member has contractually assumed liability for the obligations of the LLC.
Signing a personal guarantee voluntarily relinquishes the limited liability status and provides creditors’ grounds for personal suits with the business owner if the business cannot pay the debt. Part of that personal guarantee may require the business owner to include real estate such as a home as collateral. Defaulting on a business loan that was secured by pledging personal property may allow the lender to foreclose on that property in order to pay the debt.
Besides leases or loans, any other contract such as purchase agreements or service contracts that a business owner co-signs may give up the limited liability status. These agreements must display the company name followed by LLC in order for the owner to not be held personally liable for business debts. It is important to have a business attorney check both the language of the agreement and the signature block to ensure the agreement was signed by the owner’s capacity as a member rather than as an individual.
A member of an LLC may also be held liable for unpaid withholding taxes and unpaid sales taxes. In some instances a member of an LLC may also be personally liable for payments due to employees.
Everywhere the company name appears the suffix “LLC” must appear so that the public knows they are dealing with a limited liability company. Failure to include the suffix can lead to personal liability for the owners. There are many creative ways to satisfy this rule.
If the business owner misrepresented company facts when applying for a loan, they could be held personally liable even if the paperwork was under the company’s name. The same goes for business owners who fail to maintain a formal legal separation between their LLC and their personal affairs.
Lastly, state laws require that LLCs and corporations follow certain formalities; such as holding an annual meeting or recording meeting minutes for important company decisions. If creditors can show that one of these formalities was not observed they may be able to pierce the liability shield.
While LLCs have many advantages over other business forms such as sole proprietorships or partnerships, in order to get your letters’ worth in an LLC, all the formalities and precautions must be followed.
Contact us to make sure your LLC is providing you with the maximum protection.