Is there Personal Liability of LLC Members?

Can LLC Members ever be personally liable arising out of their position as a member of an LLC? As the name “Limited Liability Company” suggests, one would think that a member can never be liable for the debts and obligations of the LLC or otherwise while acting for the LLC.   And the law says so in Section 609(a)

“Neither a member of a limited liability company, a manager of a limited liability company managed by a manager or managers nor an agent of a limited liability company (including a person having more than one such capacity) is liable for any debts, obligations or liabilities of the limited liability company or each other, whether arising in tort, contract or otherwise, solely by reason of being such member, manager or agent or acting (or omitting to act) in such capacities or participating (as an employee, consultant, contractor or otherwise) in the conduct of the business of the limited liability company.”

Well, as always, there are some important exceptions and pitfalls to remember.  An LLC is not the perfect protection against personal liability.

Imke Ratschko Small Business Lawyer

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Personal Liability Of LLC Members for Wrongdoing

If you commit some kind of wrong towards a client or employee of the LLC, of course, you can be personally liable. For example, as a lawyer, even though I practice under an LLC, if I commit malpractice, I am still liable personally to the client.  The LLC does not protect you from the consequences of shitty service to a client/customer.  This is why you have liability insurance.

The LLC’s Articles of Organizations create Personal Liability

I have never seen this and don’t know why anyone would do this, but the articles of organization of an LLC could provide that the members of the LLC are personally liable for certain debts of the LLC, see Section 609(b) of the New York Limited Liability Company Law.

Guaranties

A member may have guaranteed the obligations of the LLC.  This is very often the case when the LLC enters into a lease.  Landlords demand that one of the members of the LLC guarantee the LLC’s obligations under the Lease.  In that case, the member is personally liable if the LLC defaults on the obligations.  So if your LLC business is renting somewhere, you are most likely personally liable for a default on the lease.

Breach of Fiduciary Duties creates Personal Liability

Members of an LLC could be personally liable to the LLC or the other members for a breach of fiduciary duties.

If the LLC is managed by members or a member is a manager of the LLC, the members or managers owe fiduciary duties.  See Section 409 (a) New York Limited Liability Company Law:

“A manager shall perform his or her duties as a manager, including his or her duties as a member of any class of managers, in good faith and with that degree of care than an ordinary prudent person in a like position would use under similar circumstances.”

And courts have said:

Each member owes a fiduciary duty to the others……The acts of working in concert and managing a limited liability company clearly gives rise to a relationship among the members which is analogous to that of partners who, as fiduciaries of one another, owe a duty of undivided loyalty to the partnership’s interests

If you are found liable, this is a personal liability. No hiding behind the LLC.

Piercing the Corporate Veil

Members may be liable under the “Piercing the Veil” doctrine.  By “Veil” they mean the normally existing shield of limited liability that an LLC provides and by “piercing” they mean some sort of conduct that makes you go: “now, really?”, “that seems wrong”, “he/she is just scheming to get out of a personal liability”.   It is not easy to prove and rather rare that someone manages to convince the courts that a member is guilty of doing that.  An indication is if there is total co-mingling of personal and LLC business banking and expenses.

A court has said (Retropolis 17 A.D.3d 209):

The burden to pierce the veil was heavy and required a showing that the member dominated the transaction and that the domination was an instrument of fraud, inequitable, or wrongful. The member’s mistakenly depositing two checks to his personal account did not prove that domination.

Another court (Colonial surety company 93 a.d. 3d 1253):

Here, O’Brien in fact admitted that he dominated the limited liability company (LLC). In addition, the evidence in the record demonstrates that O’Brien established the LLC after the prior judgment at issue herein was entered against him in order to shield his assets from petitioner, and after he fraudulently attempted to have the debt discharged in bankruptcy. Furthermore, he used LLC funds to pay personal expenses, make payments to his wife in lieu of his salary, and contribute to his personal IRA account. He also closed his personal checking account and used Lakeview checks to pay his personal bills. Based on those actions, we conclude that inequitable consequences would result if we were to permit him to shield his assets from petitioner, his judgment creditor, by misusing the LLC in this manner

Unpaid debts, wages or salaries to laborers, servants or employees

This is a big one.  Under Section 609(c) of the New York Limited Liability Company Law, the ten members with the largest percentage ownership interest can be liable for unpaid debts, wages, or salaries to employees.

But they have to go against the LLC first:

An action to enforce such liability shall be commenced within ninety days after the return of an execution unsatisfied against the limited liability company upon a judgment recovered against it for such services. A member who has paid more than his or her pro rata share under this section shall be entitled to contribution pro rata from the other members liable under this section with respect to the excess so paid, over and above his or her pro rata share, and may sue them jointly or severally or any number of them to recover the amount due from them. Such recovery may be had in a separate action. As used in this subdivision, “pro rata” means in proportion to percentage ownership interest. Before a member may claim contribution from other members under this section, he or she shall give them notice in writing that he or she intends to hold them so liable to him or her.

 

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