Liability Of A Limited Liability Company's Members Lawyers
The limited liability of members in a limited liability company (LLC) is one of the primary reasons why individuals select the LLC business structure. The liability shield of members in a limited liability company, however, is not absolute. Instead, the extension of the liability shield can be both limited and disregarded.
What Does Limited Liability Protect?
Limited liability protects the individual assets of the LLC members. Thus, the debts or claims against a company cannot be recovered by joining the members of the company. Furthermore, the debts or claims against the individual member cannot be recovered by joining the company.
What Are The Limits Of The LLC Liability Shield?
The LLC liability shield can either be determined to not extend to the acts or omissions of company members or may be disregarded altogether. In either case, if the court determines that the liability shield does not protect the individual, then a creditor may proceed to attach the personal assets of the individual member.
When Would The Acts Or Omissions Of A Company Member Not Be Found To Extend The LLC Liability Shield?
There are three basic instances where a creditor or claimant may argue that the acts or omissions of a LLC member prevents the liability shield from being extended to the member. These include:
- if the member acts on behalf of an LLC that has not yet been formed
- if the member, acting as an agent of the company and without giving notice that s/he is acting on behalf of the company, causes an injury that is recognized by the law
- if the member, acting as an agent of the company and without giving notice that s/he is acting on behalf of the company, guarantees a contractual obligation
When Would The Liability Shield Be Disregarded?
Determination of liability will be governed by the law of the state in which the entity is formed. Because LLCs are created by state statutes, states can condition, restrict or disregard the limited liability. Since most LLCs are analogous to corporations, courts have usually applied the same standards for disregarding the limited liability protection of corporations to LLCs. Although the Three-Prong Test will be applied to LLCs, the factors to be considered under Prong 1 and 2 may differ. These factors may include:
- whether Articles of Organization and annual reports have been filed and any fees have been paid
- whether there is a single member or multiple members
- whether the LLC has its own Employee ID Number and maintains bank accounts and facillities separate from the members
- whether the LLC has manifested ownership interests in intellectual property, real property, and office equipment
- whether the LLC has entered contracts under its own name
- whether the LLC has concluded an operating agreement.
Do I Need An Attorney To Determine The Liability Of An Individual Member In A Limited Liability Company?
This is a very gray area of law because many factors are considered to determine whether a member has lost the protection of a liability shield. Seeking out the services of an attorney will assist in determining whether you can attach the personal assets of a LLC member in recovering on a lawsuit.
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Last Modified: 03-15-2011 11:51 AM PDT
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