Civil/Commercial Litigation (Lawsuits)/LLC
In general, how much insulation do LLCs provide to members in matters of E&O liability and/or non-debt related liability? I understand that the debt liability is limited by the general provisions of an LLC and by the nature of the set-up within the state provisions. However, many people feel that if there is an LLC set up, they are secure from any civil litigation. How true is this in practical application both as it relates to multi-member and single member LLCs? I have always owned SCorps because I have no question as to the entity insulation from the corporate separation with the shareholders. However, an LLC would be easier given that I would not have to do payroll for a multimember LLC taxed as a partnership or sole proprietorship. I appreciate your time and help in this matter.
Before I respond further to your question, I must make clear that I do not represent you, and cannot give you individual particularized legal advice. No attorney client relationship is created by this email. For legal advice, you should hire your own attorney, and follow their advice. My role with AllExperts is limited to providing general information and suggestions for educational or general knowledge purposes. Before you take any action, consult with your own attorney.
Your question is about the limits of liability protection provided by an LLC. I appreciate your exquisite manners, and hope that you find the following helpful:
A particular answer will depend on your state and your individual business practices. I suggest that you review the theory of "piercing the corporate veil" and speak with an attorney licensed in your state who does business litigation. This might be helpful:
In my state, the Secretary of State publishes a free guide to starting a small business which is an excellent resource on a broad number of topics, updated annually, and includes an important section warning about piercing problems, and offering pretty good suggestions to avoid them.
Forming an LLC or other formal business entity is a good first step to protecting the personal property of the business enterprise's member(s) from liability, but it is not the end of the task, nor a silver bullet. If you fail to observe the corporate form, whatever the letters at the end of the business name, the "members" might have serious problems.
Also, it is a common practice for angry plaintiffs to name as many defendants as they can think of, including the principal human beings behind a business, when such plaintiffs sue a business. If this is a concern to you, it may do well again to speak to an attorney in your state who can give you some suggestions or guidelines about the decision making judges in your jurisdiction will apply given a motion to dismiss by a human defendant. Being careful to comport yourself in your business capacity rather than your personal or individual capacity may be a good idea, but again is not a panacea.
In my reckoning, the number of member(s) in a business operation of any type is not dispositive when addressing the issue of personal liability of its principals for the conduct of the business. While it may be a factor in a piercing the corporate veil analysis, other circumstances I reckon to be more within your control are far more influential in my opinion.
I do not share your view that any magic letters at the end of a business name or tax designation status affords unquestionable protection. You are welcome to disagree with me, but I suggest that before you do so at your peril that you have your attorney run a quick search for piercing cases, and just look at the alphabet soup after the company names that run into trouble. As a side note, I don't take a view that any contemplated conflict in the law has a certain outcome, and caution folks from leaping to such untennable positions.
I am not a tax expert, in fact I have a few colleagues in that area that I defer to, and you may find others here on AllExperts to give advice on that subject. Therefore, I do not offer any tax suggestions. I concur that consideration of your tax liability, and the costs of preparing annual tax returns, should be given in electing your business form.
Very generally speaking, I do not consider there to be any definitive measure of liability protection created by establishing your business form. Rather, I submit for your consideration that doing so is certainly vastly superior than failing to form a duly organized business of some type. Establishing your business as an LLC or whatever form you like will open the door to building layers of protection that a solo proprietorship or default partnership simply do not permit.
I hope this helps, good luck to you.
SMITH & RAVER LLP
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