Can LLC Members Be Held Responsible for Financial Obligations?
The primary reason for forming a limited liability company is that, like a corporation, a LLC provides its members with insulation from personal liability for company debt. While a LLC provides a blanket of protection for its members, there are certain situations in which a member can become personally responsible for the company’s financial obligations.
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Limited Liability
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As a rule, the members of an LLC are not responsible for the financial obligations incurred by the business. For instance, assuming the company is operated in accordance with the law, a creditor cannot come after an individual member in her personal capacity to collect the ordinary debts of the business. Despite this general rule, there are a number of circumstances where LLC members can become personally responsible for company debt.
Separate Entity
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To maintain limited liability, members must operate an LLC as a separate business entity, rather than as an extension of their own personal affairs. Members who mix business funds with their own personal funds, fail to keep adequate records, or otherwise fail to operate the LLC as a legitimate business run the risk of becoming personally liable for the company’s bills and debts.
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Guarantee
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Perhaps the easiest way for an LLC member to become personally responsible for the financial obligations of the business is to sign a personal guarantee. Often, when a new LLC incurs a significant debt, one or more of its members are asked to sign a document assuming secondary liability for the debt in the event of the company’s default. If the LLC fails to pay the debt, the creditor has the right to collect from any member who acted as guarantor.
Violation of Law
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An LLC member who acts fraudulently on behalf of the LLC or otherwise engages in illegal activity in the name of the company runs the risk of personal liability. If someone is harmed because of the member’s actions, the harmed person can sue both the company and the individual member. If the court deems the member individually responsible, she can be required to pay damages from her personal assets.
Considerations
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Taking certain basic steps, like avoiding personal guarantees, entering into a written operating agreement and maintaining a separate LLC bank account, can help keep members insulated from personal liability for a LLC’s financial affairs. An attorney can give you specific advice on how to maintain limited liability.
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