While LLC members enjoy limited personal liability for many of their business transactions, this protection is not absolute. This drawback is not unique to LLCs, the same exceptions apply to corporations. An LLC member can be held personally liable if he or she:
- personally and directly injures someone
- personally guarantees a bank loan or a business debt on which the LLC defaults
- fails to deposit taxes withheld from employees’ wages
- intentionally does something fraudulent, illegal, or reckless that causes harm to the company or to someone else, or
- treats the LLC as an extension of his or her personal affairs, rather than as a separate legal entity.
This last exception is the most important. If members do not treat the LLC as a separate business, a court might decide that the LLC doesn’t really exist and find that its owners are really doing business as individuals who are personally liable for their acts. To keep this from happening, make sure you and your co-members:
- Act fairly and legally. Do not conceal or misrepresent material facts or the state of your finances to vendors, creditors, or other outsiders.
- Fund your LLC adequately. Invest enough cash in the business so that your LLC can meet foreseeable expenses and liabilities.
- Keep LLC and personal business separate. Get a federal employer identification number, open a business-only checking account, and keep your personal finances out of your LLC accounting books.
- Create an operating agreement. Having a formal written operating agreement lends credibility to your LLC’s separate existence.