• Ronald A. Flate

LLC Member Personally Liable

The owner of a lot on which a four-unit condo complex was to be built contracted with a small residential construction company to build the condos. The construction company was formed as a limited liability company (LLC), the only members of which were a licensed home builder and his wife. The licensed builder served as general contractor on the project, overseeing subcontractors that the LLC had selected.

A couple of months into construction, some structural problems surfaced. At first the builder’s assurances that the problems would be fixed calmed the tensions with the owner, but over time, old defects weren’t fixed and new ones arose, and the relationship deteriorated. Eventually the builder walked off the project, leaving dozens of defects unremedied. When the owner sued for damages, based on negligence and breach of warranties, he named as defendants not only the LLC but one of its individual members, the licensed builder.

One of the appealing characteristics of a limited liability company, as its very name indicates, is that a member of the LLC generally is not personally liable for the LLC’s liabilities. In fact, the state LLC statute that applied in this case states that a “member or manager is not personally liable for a debt, obligation, or liability of the company solely by reason of being or acting as a member or manager.”

As the individual builder discovered when he was found personally liable for a judgment of nearly $1 million, the LLC shield against personal liability is not impenetrable. The state supreme court ruled that the protection against personal liability applies only to vicarious liability for nontortfeasor members. An individual who has done nothing wrong will not be held liable simply by virtue of being a member or manager of the LLC. Where, as in this case, the individual is guilty of negligence, the protection of the LLC business form is lost.

The court acknowledged that, at least at first blush, its decision appeared to strip away one of the main reasons why a person chooses to form an LLC. But it was satisfied that there are other unaffected benefits to choosing to start a business as an LLC. The controlling rationale is akin to the concept of “piercing the corporate veil,” that is, under some circumstances holding an individual corporate officer liable for wrongful conduct. Or as the court put it: “You don’t buy immunity from suits for your torts by being a member of a business corporation.”

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