Limited Liability of Members and Managers

Personal Liability of Members and Managers

An LLC generally shields its members from liability for the company’s obligations. However, there are circumstances in which members may be held personally liable for the LLC’s obligations. Here are a few examples:

1) If a member has an oral side agreement to reimburse the LLC for payments made on a note, which he or she signed in their capacity as a member of the LLC, the individual may be held personally liable.

2) When signing contracts or other obligations, members should always include their title (e.g., Chief Executive Officer) and the LLC’s name. This will ensure that any breach of contract claims against the member individually will be dismissed, especially when there is no evidence that the member intended to be personally liable. Any contractual obligations assumed by the LLC belong to the entity, not the individual signatories or the LLC’s members. Individuals who sign a contract that indicates title but does not name the LLC, may bind themselves instead of the LLC on the contract (by virtue of the individual’s failure to respond to a specific discovery request, for example). However, If the signature block of the contract states the name of the company without the “LLC” designation, a court may still consider the variance too insignificant to find the individual signatory personally liable. This finding is further supported if there is no evidence that the other party to the contract was ever misled about the company’s identity as an LLC. However, a person who knowingly omits “LLC” in the signature block is liable for any indebtedness, damage, or liability caused by the omission. Even when an individual signs a contract as president of the LLC, a court may hold the individual personally liable if the contract includes personal guarantee language. The bottom line: contracts should never include personal guarantee language and signature blocks should always include 1) the signing person’s title and 2) the company’s name, including the “LLC” designation.

3) Members of an LLC who personally participate in tortious conduct (bad acts) of the company may be held personally liable for the consequences of their conduct. Members or managers may be personally liable if they, in their individual capacities, damage someone else’s contractual or business relationships. For example, if a member makes a down payment under a contract of the LLC to purchase real estate and uses a personal check that bounces, he is personally liable for the bad check. An agent or an officer who participates in the commission of a tort is liable whether or not he is acting on behalf of another or the LLC. Even if officers and agents of the company are not participating “hands on” at every step, they may be held personally liable for violations. This liability is not based solely on their membership in the LLC. Rather, it is the fact that they are present and participating in the operation of the company while a violation is being committed (either by them or the company) that incurs the liability. The LLC’s members are not, however, always liable for bad acts of another person associated with the company: if an employee commits a tort without approval or knowledge of the member, then the member may remain insulated by the LLC.

4) As for negligent conduct, a manager of an LLC may be held personally liable for approving, directing, actively participating in, or cooperating in the company’s negligent conduct.

5) An LLC’s officers may be held personally liable if they are acting on behalf of the company, and the company, through bad faith misrepresentation, breaches a contract. Remember, where the protection of a business entity like an LLC is nullified, Agency Law principles come into play to evaluate the application of liability. Under the Restatement Second of Agency, authority to do an act can be created by written or spoken words or other conduct of the principal which, reasonably interpreted, causes the agent to believe that the principal desires him to act on the principal’s account.

Protect the distribution of authority by visiting: