Are there exceptions to Limited Liability?
Even though LLC owners enjoy the benefits of limited personal liability for many transactions of their business, it is important to note that this protection is not absolute. The owner of the LLC may be held personally responsible if he/she:
- purposefully does something illegal, fraudulent, or clearly wrong that causes injury to the company or someone else
- is unsuccessful in depositing taxes withheld from employees’ wages, or personally certifies a business debt or a bank loan that the LLC defaults on
- personally and directly hurts someone, or
- acts as the LLC in the broadening of his or her personal affairs instead of an individual legal entity.
The most important is the final exception. There are times when a court may declare that an LLC isn’t real and find that its owners are actually conducting business as individuals who are in fact responsible for their actions. To prevent this, be sure that your co-owners and you:
- Act legally and rationally. Do not hide or misrepresent material facts or the position of your finance to creditors, vendors or other third parties.
- Sufficiently fund your LLC. In order to meet foreseeable expenses and liabilities, make sure to invest adequate funds into the business.
- Maintain the LLC and personal business separate. Maintain your personal finances away from your LLC accounting books. Create a business-only checking account and obtain a federal employer identification number.
- Prepare an operating agreement. To create liability for your LLC’s separate existence, a formal operating agreement in writing is helpful.
When your limited liability protection doesn’t shield your personal assets, a good liability insurance policy will help. For example, if you are a massage therapist and you hurt a customer’s back by accident, you will be covered by your liability insurance policy. This insurance also comes into play to protect your personal assets in the event that the court ignores your limited liability status.
This insurance can also protect your corporate assets from claims and lawsuits, as well as protect your personal assets in certain situations. However, it is important to realize that commercial insurance typically doesn’t protect corporate or personal assets from unpaid debts of the business, whether they’re personally insured or not.