If you run your business properly as a limited liability company (LLC), you can shield your personal assets from most claims arising from your venture. However, there are important exceptions to this general rule of LLC member personal liability protection you should be aware of and plan accordingly.
These exceptions include:
- Environmental Contamination
- Personal Guarantees
If your business owes taxes to the U.S. Internal Revenue Service (IRS) or your state’s department of revenue, you may be personally liable for those taxes if the LLC lacks sufficient income or assets to pay the amount owed. Subject to certain exemptions (e.g. a homestead protection statute), the taxing authority may attempt to levy on your assets (e.g. personal investments) in addition to the LLC’s assets in order to increase the odds of payment.
As a general rule of thumb, you may be held personally liable for your LLC’s environmental contamination issues under the federal Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA) and/or similar state environmental protection laws.
For example, if your LLC cannot afford to pay for environmental remediation of a contaminated site, you may be personally on the hook for payment of remediation costs.
When an LLC is new, has minimal assets or income, or there are circumstances that create doubt about the ongoing viability of the company (e.g. potential loss of government subsidies), it’s common in certain business transactions to require a personal guarantee from LLC members (and their spouses) to increase the odds of performance and minimize the risk of lost.
Two common situations where personal guarantees are sought from LLC members are (1) commercial leases and (2) business loans. Landlords want their rent and lenders want to be repaid.
If your limited liability company can’t pay rent or defaults on a loan, those personal guarantees mean you may be responsible for payment instead.
Will A Corporation Shield Me From These Personal Liabilities?
No. Generally your personal liability exposure for these important exceptions to the entity shield exist whether or not your business is a limited liability company or a corporation (C corp or S corp).
Although the entity’s liability shield is important to have, it’s not 100% effective.
Can You Minimize LLC Member Personal Liability Exposure?
Yes. An experienced business lawyer can help reduce your personal risk exposure as an LLC member by the language used in your LLC’s operating agreement, in business contracts, and advising you to take other steps.