When Can a Member of an LLC Be Personally Liable for Judgments Against the LLC?
Consulting with reliable legal counsel can give you a clearer picture of this complex matter of law.
Limited liability companies (LLCs) combine the best of partnerships and corporations, giving them many advantages over other forms of business entities. Like corporations, but unlike partnerships, LLC members usually are not personally liable for judgments against the business unless they sign a personal guarantee.
As with other business law matters, understanding LLC member liability is essential when running a company, as it protects the business, its members, and its employees from harm. If you’re unsure on whether an LLC member can be held personally liable for a judgment against your business, consulting with reliable legal counsel can give you a clearer picture of this complex matter of law that can have far-reaching consequences.
The Limited Liability Protections Members and Businesses Get From an LLC
People typically form LLCs primarily to avoid personal liability for the debts of the business they own or are involved in. While the limited liability an LLC provides isn’t perfect, it does, in most cases, protect owners from personal liability for any wrongdoing co-owners or employees commit during the course of business. Protected personal assets include:
- Personal bank accounts
- Private investments
Of course, if the LLC is found liable for negligence or wrongdoing, its bank accounts or property can be taken by creditors or others to satisfy a judgment against the LLC. And if an employee or owner commits a wrongful act, they could be personally liable for their actions, but an LLC co-owner who was not involved in the wrongdoing would not be.
What To Know
So, can an LLC owner be personally sued in Florida? The short answer is yes. Though it’s true owners of an LLC have limited personal liability, it isn’t necessarily unqualified. There are several situations in which a lawsuit against an LLC’s owner or individual member may be appropriate, including when:
An owner personally guarantees the LLC’s debts.
LLC owners sometimes guarantee debts of the business using their personal assets as collateral. Indeed, banks and other lenders often require LLCs to sign a personal guarantee before making a small business loan.
LLC Member Breach of Duty
Florida Statutes Section 605.04093 states LLC managers or members may be personally liable when they fail to perform their duties. The narrow section says personal liability cannot be imposed unless the manager’s or member’s breach of duty meets one of the following conditions:
- Violation of criminal law.
- Involves a transaction that bestowed an improper benefit upon the manager or member.
- The breach was an improper distribution.
- The manager or member acted in conscious disregard of the LLC’s best interests or engaged in willful misconduct.
- The breach can be attributed to recklessness or an act or omission committed with malicious purpose or in bad faith.
When a plaintiff is able to “pierce the corporate veil.”
In cases where an individual owner doesn’t personally guarantee the LLC’s debts, they can still be sued personally, and the court may find them liable. In general, courts err on the side of upholding LLC protections and only pierce the corporate veil where there’s wrongful or fraudulent conduct. They may also find there is no true separation between the LLC and its owners.
Courts consider several factors when determining whether to pierce the corporate veil:
- If the LLC engaged in fraudulent behavior, and to what extent.
- If the LLC did not comply with corporate formalities like holding annual meetings or filing requisite documents.
- If the LLC owner commingled assets of the LLC with personal assets.
Florida business laws regarding piercing the veil are more restrictive than in other states. For instance, the Florida revised Limited Liability Company Actprotects LLC owners even when corporate formalities aren’t observed.
What The Florida Courts Say
In a recent case, entitled Segal v. Forastero, Inc., Florida’s 3rd District Court of Appeals overturned a lower court’s finding against a real estate LLC for breach of contract. The trial court found that an individual shareholder was responsible for the judgment, allowing the plaintiff to pierce the corporate veil.
In its decision, the appeals court found none of the three elements needed to prove the company was an alter ego of the defendant were met. Since all three elements must be satisfied to pierce the corporate veil, it’s significant the Appeals Court found none of them would apply. While Florida’s three requirements to pierce the corporate veil are similar to those in other states, it’s prudent to consult with legal counsel familiar with LLC laws before concluding anything about your particular situation.
If you need help with an LLC or other business law-related matter, Munizzi Law Firm offers practical legal guidance and advice on handling your concerns and protecting your business and personal interests. Contact us today to learn more about the potential liabilities you could face as an individual LLC member and how steps you take today can protect your LLC and financial future from lawsuits.