Personal Liability in LLC: Can You Be Sued for Actions of the Corporation?

The structure of an LLC (Limited Liability Company) is often thought to insulate personal assets from business liabilities. However, the personal liability of the owner, or member, of an LLC can depend on various factors, including individual errors, legal actions, and management behaviors. In this article, we will delve into the nuances of personal liability within an LLC, exploring under what circumstances a member can face personal lawsuits for errors, omissions, and illegal actions that occur under the LLC's umbrella.

Personal Liability for Individual Errors and Omissions

LLC members are generally not personally liable for the company's operational errors or omissions, provided they have not personally engaged in the day-to-day management of the business. However, there are specific scenarios where personal liability can extend to the member for individual actions or omissions:

Allowing a Driver with a Poor Driving Record to Drive: As a manager, if you allow a driver with a poor driving record or known alcohol or drug issues to operate a company vehicle, you can be held personally liable for any accidents or damages resulting from this negligence. Personal Actions: If a member engages in actions that go beyond the scope of management and directly infringe on the rights of another party, they can face personal lawsuits, regardless of the LLC's protection.

These examples highlight that while the LLC structure provides a certain level of protection, personal liability can still arise when individual members engage in certain actions.

Legal Shield and Illegality

The LLC's legal shield is designed to protect its members from being held personally liable for the company's legal acts. However, if those acts are illegal, the legal shield may not provide protection. In such cases, members may face personal suits for illegal activities performed by the LLC:

Illegal Acts by the LLC: If the LLC engages in illegal activities, the legal shield will not protect a member from personal liability. In these situations, legal protections may be waived, and a member can be held personally responsible for the illegal actions. Legal Defenses: While the LLC may shield a member from direct liability for the company's operations, if the member is involved in illegal activities, they may still face personal lawsuits. These members can defend themselves by showing that they did not engage in the illegal actions or that their involvement was minimal.

Understanding the legal shield's limitations is crucial for members aiming to minimize their personal risk. It emphasizes that while some personal assets are protected, illegal activities can lead to personal liability.

Isolated Situations and Management Threshold

Even if an LLC has been structured to protect its members, there are specific circumstances where a member can still face personal lawsuits. These situations often arise when the member has exceeded the management threshold and acted independently:

Exceeding Management Threshold: If a member is involved in the day-to-day management of the LLC and engages in actions that directly impact the company, they may still face personal liability. For instance, if a member personally engages in illegal activities or makes significant operational errors that directly harm a third party, they can be held personally liable, regardless of the LLC's legal protection.

Proving Management Involvement: In legal proceedings, the burden of proof lies with the member to show that they were not personally involved in the management and operations of the LLC. While this can serve as a defense, it does not eliminate the risk of personal liability. Members who maintain their involvement in significant business decisions may face greater personal risk.

Understanding the balance between management involvement and protection is essential for minimizing personal liability. This involves keeping a clear record of management activities and ensuring that actions taken by the LLC are within the scope of authorized business operations.

Conclusion

While the LLC structure is designed to provide a level of protection from personal liability, it is not a complete shield against all legal risks. Members must be aware of their personal liability for individual errors, illegal actions, and oversights that occur under the LLC's operations. By understanding these potential risks and taking proactive steps to minimize them, members can better protect their personal assets and business interests.

Key Takeaways:

Personal liability can arise for individual errors or illegal actions beyond the scope of management. The LLC's legal shield limits liability for legal acts. Members must demonstrate non-involvement in management for legal defenses.

For more detailed advice on legal protections and to minimize personal liability, consult a business attorney specializing in LLCs and corporate law.