Will Forming An LLC Protect Against Being Sued?

Dear M & M:

If I form an LLC will it protect me from being sued?

– John

Dear John:

A Limited Liability Company or LLC is one of the legal structures one can choose to operate a business. The definition of legal entity according to the business dictionary is, “An association, corporation, partnership, proprietorship, trust, or individual that has legal standing in the eyes of the law.

A legal entity has legal capacity to enter into agreements or contracts, assume obligations, incur and pay debts, sue and be sued in its own right, and to be held responsible for its actions.”  As the name suggests a Limited Liability Company (LLC) protests its members or managers and the LLC itself from certain types of legal liability. As to what extent this limited liability protects and how limited is dependent on many factors.

In all states if you form an LLC and don’t personally guarantee or personally promise to pay its debts ordinarily you will not be personally liable. LLC creditors can go after the LLC bank accounts and other assets controlled by the LLC, but your personal property can’t be touched. You will find when you go to sign a lease, get a loan or credit extensions you will be asked to personally guarantee the debt.

Most creditors don’t want to be left holding the bag if your business goes under. An LLC will protect owners from personal liability from any wrong doing committed by co-owners or employees during the course of business. If an LLC is found negligent for any wrong doing by an employee or co-owner, the LLC’s assets can be taken to satisfy judgment.

Members, managers or other owners of the LLC would not be personally liable if they did not commit any wrong doing. The owner or employee who committed the wrong doing could be personally liable for their actions and the debt. Example: While delivering office supplies an employee driving the company truck runs over and kills a pedestrian in a crosswalk. It turns out the driver was driving while drunk.

The company is sued and found liable for its employee’s actions while on the job. All of the company’s assets insurance, property and money can be used to pay judgment. However, the owners of the LLC not involved in the accident are not personally liable for any claims. So their personal assets cannot be taken to pay any judgment awarded.  There is also an exception to the limited liability provided from an LLC. This exception exists in all states.

If you form and LLC you will remain personally liable for any wrong doing you committed during the course of your work. You can be personally liable if you were involved in something that caused injury to someone, failed to deposit taxes withheld from employees’ wages, intentionally did something fraudulent, illegal or irresponsible that caused harm, or treated the LLC as an extension of your personal affairs and not as a separate entity.

The last example (treated the LLC as an extension of your personal affairs and not as a separate entity) maybe you never got around to opening a separate bank account for the LLC and operated the business from your personal checking account. If you as an owner, member, manager or co-owner of any LLC were involved in any of the above acts could be held personally responsible. State laws vary but, never say never.

As stated an LLC’s assets cannot be taken by creditors to satisfy personal debts against a member, manager, owner or co-owner of a LLC however, there are other things a creditor can do to collect from someone with interest in an LLC (charging order – getting LLC to pay, foreclosing on debtor’s LLC ownership, or getting the LLC dissolved). In summary, forming an LLC isn’t your get out of jail card and it will not protect your personal liability from your own wrongdoing.

It does offer a layer of protection and strengthen the wall between you and a lawsuit. It would strongly be advised to buy insurance to further protect that wall. As always we are not attorneys and we strongly recommend you see one to add some additional articles to your organization to further protect yourself and your company.

-M&M

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