Liability

Statutes regarding state Limited Liability Companies specifically provide that members of a Limited Liability Company are not held personally liable for the company’s debts and obligations. This limited liability is similar to the liability protection for corporate shareholders, partners in a limited partnership, and partners in a limited liability partnership. Under certain conditions, however, a member may become personally liable for a Limited Liability Company’s debts.

An individual member is, in most cases, personally liable for his own torts and for any contractual obligations entered into on behalf of the member and not on behalf of a Limited Liability Company. Additionally, a member is personally held liable to a third person if the member personally guarantees a debt or obligation to that person. A member incurring debts and obligations on behalf of the Limited Liability Company prior to the company’s formation is jointly and severally liable with the Limited Liability Company for those debts and obligations.

Members may become personally liable for a Limited Liability Company’s debts or obligations under the “piercing-the-corporate-veil” theory. This doctrine imposes personal liability upon corporate shareholders and applies if a corporation is undercapitalized, fails to follow corporate formalities, or engages in fraud. Although the law of Limited Liability Companies is still under development, piercing the corporate veil is likely applicable to any Limited Liability Company failing to follow legal formalities required to manage the company. Statutes regarding Limited Liability Companies in the states of Colorado, Illinois, and Minnesota specifically apply the corporate veil-piercing theory to Limited Liability Companies.

A Limited Liability Company member is generally considered an agent the company and therefore may bind the company for the debts and obligations of the business. When a member has apparent or actual authority and is acting on behalf of a Limited Liability Company while carrying on the usual company business, the member binds the Limited Liability Company. If a third person has knowledge that the member is not authorized to act on behalf of the company, then the Limited Liability Company is generally not held liable for the member’s unauthorized acts. In fact, in some states limit a member’s authority to act as an agent of a Limited Liability Company.

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