Entrepreneurs may choose from several types of business entities. The type of business entity chosen can have significant tax and personal liability implications for the owners. Members of limited liability companies, or LLCs, enjoy limited liability -- as the name of the entity suggests -- which generally means the members cannot be held personally liable for the business debts. But this is not always the case.
The law treats corporate business entities, like LLCs, as if they are a wholly separate legal entity. The business is separate and distinct from the business owners, even though the business owners are actually operating the business. If an LLC incurs debts or otherwise becomes legally liable to another person or entity, the business assets of that LLC may be at risk to satisfy a judgment against the company, but in general, the personal assets owned by the owners of the LLC would be shielded.
A member’s interest in the LLC is generally determined by the amount of money the member invested into the business or the value of the property given by the member to the LLC. An LLC interest is distinct from personal assets. Personal assets generally include a person’s home, personal car or personal property.
While the general rule of limited liability shields the individual members from personal liability -- meaning the individual members would not be liable for the LLC debts -- an exception exists. If the individual members do not respect the legal distinction between the business entity and their own personal liability, the law may hold the members personally liable for the business. This means that if the members are only using the LLC entity in a wrong or fraudulent way, such as recklessly borrowing money or intermingling business funds with personal funds, the member may be found personally liable for the business debts caused as a result of his recklessness or neglect.
Determining whether a member of an LLC is personally liable for the debts of the business requires an in-depth analysis of the facts and circumstances surrounding the debt. In addition to piercing the veil of the LLC, a member may become personally liable in other ways. For example, a member may personally promise to be liable for a particular debt. Because of the factual nature of each inquiry, you should seek individual legal advice before proceeding.