Limited Liability–What is It?

We live in a litigious society–lawsuits are going on all the time to recover money damages from various persons.  To protect against lawsuit liability, many people seek to limit liability by using an entity such as a limited liability company.

The principal motivation for the creation of an LLC is usually the desire to eliminate potential liability for the owner for the LLC’s future obligations.  Limited liability implies that no owner as such is liable for the debts or obligations of the LLC itself.  However, limited liability does not shield an owner from the owner’s own negligence. For example, if an LLC member was a driver involved in an auto accident and the LLC member was at fault, the LLC would give no protection to the member as the driver of the car.

Generally, the personal assets of an LLC member cannot be reached by legal process to satisfy an LLC’s debt or obligation.  Thus, only the member’s investment in the LLC is subject to such obligations.

There are other exceptions to limited liability in an LLC context:

  • environmental damage liabilities can penetrate either a corporation or an LLC to impose direct liability on the individuals involved with the generation, placement or spilling of toxic or hazardous waste
  • an LLC member is liable for any agreements to contribute property or cash to the LLC
  • an LLC member is liable for property or money received from the LLC by mistake
  • any obligation or debt created through fraudulent conduct by an LLC member cannot be avoided by that member
  • any LLC loan or debt guaranteed in writing by an LLC member