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Avoiding Personal Liability in an LLC

— June 8, 2015

When forming an LLC there are certain precautions that owners must take in order to avoid incurring personal liability in connection with your business. The general rule in LLCs is that a member or manager is not personally liable for a debt, obligation, or liability of a limited liability company, including a debt, obligation, or liability under a judgment, decree, or order of a court. This rule means that, for the most part, you will not be personally liable for your LLC’s activities. But, this rule is not absolute; there are some exceptions. In Texas, a member or manager can incur personal liability if they: 1) personally and directly injure someone; 2) intentionally do something fraudulent or illegal 3) personally guarantee a bank loan or a business debt on which the LLC defaults; 4) fail to pay taxes; or 5) treat the LLC as an extension their personal affairs, rather than as a separate legal entity.

First, it is always important to remember that you are always liable for your own torts. If, for instance, you cause someone injury while driving your food, you are accountable for your own actions. LLC protection is designed to protect you from the liability of the LLC as an entity.

Second, committing fraud or intentional misrepresentation will cause you to be personally liable for the LLC. An example of this is a purposeful misrepresentation, or lying, in the information you provide when attempting to get a loan for your company. This would be fraud or an intentional misrepresentation that will cause you to be personally liable for the debt.

Third, you will be liable for the liabilities you assume by contract. What that means is that if you personally guarantee or sign a document, your personal assets are liable. There may be times when both your personal and company signatures may be necessary when you sign a contract if your business is new. When signing contracts for the LLC be careful to sign not in your personal capacity but in your capacity as a governing member of your company. It is not enough to simply add, “manager” after your name when you sign. One can not stress enough that this is a picky requirement that you must fulfill exactly to avoid potential liability problems. A proper signature, in a case similar to this, would be something like “John Smith, Manager, Company Name, LLC.”

Fourth, according to the Texas Tax Code, LLCs must pay the Franchise tax. LLC members or managers face full personal exposure if the entity fails to pay its taxes. If a registered entity’s status is forfeited for nonpayment of taxes, then each director, officer, or manager may be held liable for debts of the entity from the date on which the tax was due up to the time the entity is reinstated. This means that you should be careful to file and pay your franchise taxes when they are due or you will be operating without LLC protection as a sole proprietorship. A company’s first report is due one year and 89 days after its beginning date.

Fifth, creditors can also try to pierce the corporate veil, or go after your personal assets and disregard the liability protection of the LLC. Texas courts have explained piercing the corporate veil as, when there is such unity between the individual and the entity, then the entity will cease to be separate. In other words, if in the future if your company is sued or incurs debt, the court could find that your LLC is not truly legally separate from you and that it is you operating the business as an extension of your personal affairs. Therefore, you are personally liable. cuisiWhat you can do to protect yourself is to maintain the separation between you and your company. If a problem does arise, the court may look to see if the LLC’s property and your personal property have been kept separate, whether your LLC’s assets have been used for personal purposes, as well as how much money has been kept in your LLC in comparison to its expenses. Beware of paying the LLC’s bills out of your personal credit card or making important decisions without recording them in minutes, as you can show a separation between yourself and the LLC by showing you have not done these things. While failure of the LLC to follow these kinds of formalities is not a basis to hold a member liable for any type of obligation of the LLC, it is important to maintain formalities as a defensive measure in case general, in case your LLC is sued.

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