Limited Liability Company (LLC) Liability Protection
Learn the particulars of liability protection for a limited liability company (LLC). Proec is a major reason for why business owners choose this type of company.
The primary purpose of an LLC is to provide liability protection to the members. An LLC protects the members of the LLC from liability but not the LLC itself. Since the LLC itself is not protected, it can be sued, and the LLC’s assets can be seized to pay court ordered judgments.
“ Example – LLC Liability Protection - Dave and Lee acquire a rental and hold it in an LLC. The tenant claims she got sick from mold in the building and sues. If the tenant wins the suit, then the only asset in jeopardy is the rental property itself and no other assets owned by Dave and Lee can be seized to pay the judgment. ”
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Members, agents, and managers are not personally responsible for LLC debts and obligations. However, depending upon state law they may be held liable for:
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Debts they personally guaranteed.
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Wrongful acts committed as a member.
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Promised, but not made, contributions to the LLC.
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Wrongful distributions (under state law) from the LLC.
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Improper personal benefits from the LLC.
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Unremitted sales taxes.
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Unremitted employment taxes.
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Criminal acts.
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Malpractice claims against professionals in states that permit professional LLCs.
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In some states to the extent the LLC is under-capitalized or under-insured.
Using Multiple LLCs
Property held within an LLC provides protection to its members against claims unrelated to the business. However, property held in that LLC is subject to claims. Liability can be further limited by forming multiple LLCs; thus, only assets within each LLC are subject to claims associated with that LLC.
“ Example – Multiple LLCs – Dave and Lee in the prior example have two rental properties held within a single LLC. Thus, both properties’ equity would be in jeopardy to the tenant’s mold sickness claims. On the other hand, if each property was held in a separate LLC, the tenant’s claims would only be against the assets of the LLC holding the property subject to the mold claim. ”
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Some states allow the creation of what is referred to as Series LLCs. These are structured to provide separate protection by separating the LLC in separate cells holding different assets and eliminating the need to create multiple entities.
States allowing Series LLCs include: AL, DE, DC, IA, IL, KS, MN*, MO, MT, NV, ND*, OK, TN, TX, UT, and WI*.
*State allows series LLCs but doesn’t specifically provide a liability shield between the different series.