Most businesses use a limited liability company or corporation, as you may know. These entities protect your personal assets, but there are limitations, as you might expect. Read ahead to learn what LLCs do and don’t protect.
When deciding what type of business formation to utilize for your company, it is very important to take into consideration the benefits and takeaways that each type of organization provides. There are several different business structures that a person can choose from including a partnership, a limited partnership, a limited liability partnership, a limited liability company, and a corporation. Of these, an LLC is one type of legal entity that provides some of the greatest benefits for small businesses by providing both protection from personal liability and flexibility in taxation.
Benefits of Using an LLC
One of the main benefits of forming this type of business structure is that it protects owner’s personal assets if they become responsible for significant financial obligations. In the event of a lawsuit in which a judgment is entered against the LLC that includes financial damages, even if the business runs out of money and assets, its members generally cannot be held personally liable. The debts, obligations, and liabilities of a limited liability company, whether arising in tort, contract, or otherwise, are solely the debts, obligations and liabilities of the business. A member or manager is not personally liable for these debts, obligations, or liabilities simply because they are involved or acting as the company’s officer.
Another benefit that choosing this type of set up brings is the taxation benefits. Limited liability companies in South Carolina are taxed as pass-through entities, meaning the business does not pay any sort of LLC income tax. Instead, the organization members pays for the organization’s losses and revenue on their personal income taxes. This is beneficial because the business formation has the choice to be taxed as a partnership which avoids the double taxation, which occurs in corporations. A limited liability company is not a tax payer, but still is required to file a tax return.
LLCs can also elect to file an S election to gain the tax status of what people refer to as an S-Corp.
LLC Personal Asset Protection Limitation
Though members of this type of business structure generally cannot be held personally liable, there are certain circumstances where forming this legal entity type cannot protect you from personal liability. In other terms, though the South Carolina statute shields the organization members’ personal assets, it is not an absolute protection. Some instances that a member of an LLC can be held personally liable include personal guarantees, breaching the corporate veil, employee wages, and when an officer is responsible for a tort personally.
16 Jade Street, LLC v. R. Design Const. Co.
This case shows when owners can be held personally liable. Carl Aten and his wife were the sole members of R. Design Construction Company. Aten accepted a job on behalf of his company to be the general contractor for Jade Street’s condominium project. There were several defects in the construction of the condominiums and Aten was sued personally as one of the members of the LLC. The Court ultimately ruled that Aten could be held personally liable for his own negligence in the course of conducting the company’s business. Aten’s wife was not held personally liable because she did not commit any wrongdoing. The Court recognized that an individual has the right to sue one’s own tortfeasor, even if the individual was acting in his or her capacity as an organization’s member. The takeaway is that an individual who commits a tort in furtherance of their business structure can expect to be held personally liable for their own actions.
Dutch Fork Development Group II, LLC v. SEL Properties, LLC
Personal guarantees also open the door for a member of a limited liability company to the possibility of personal liability. When an organization’s member makes a personal guarantee for a debt incurred for your business, that person can be held personally liable should the business not repay that debt. In this case, the two parties entered into two agreements for the development of residential subdivisions. On November 19, 2001, SEL obtained a loan from the National Bank of South Carolina (“NBSC”) in the amount of $2,001,375 to provide for the development of Phase I of the Courtyards. Shortly thereafter, SEL was reimbursed $800,000 from the loan proceeds for the original land acquisition. Appellant, however, personally guaranteed that the development loan would be repaid and that expenses would be covered. By personally guaranteeing the repayment of that debt, the members of SEL became personally liable for that particular financial obligation when they failed to repay the debt. The Court held, “A corporate officer who does personally guarantee an obligation may be held personally liable for that particular obligation, but such a personal guarantee does not render them personally liable on any and all corporate obligations.”
In other words, a personal guarantee creates a new and personal obligations that overrides the business structure protection. It is a new agreement that you sign that says you are personally agreeing to meet the legal entity’s obligations if the organization cannot.
There are also a few other scenarios where you may be personally liable that are statutory. For example, if an employee’s wages do not get paid, then the business owner can be personally liable. Same is true with taxes where a company’s officer may be personally liable for unpaid taxes.
How to File an LLC
When formed correctly, this type of business structure provides a number of benefits that protects individual members from being personally liable and provides for a tax pass-through that avoids double taxation. However, to avoid the limited scenario’s when a member can be held personally liable, it is important that you understand your responsibilities as a company’s officer to ensure that you are not opening yourself up to liability.
Using a Lawyer
If you are forming a business entity, read LLC set-up in South Carolina: purpose, application, registration to learn more, and contact Henderson & Henderson at 843-212-3188 to speak to an experienced attorney who can assist you with your questions and concerns.
Using an Online Service
If you are on a budget but still want your organization formed correctly, we recommend Drafted Legal website to start a business LLC, create, set-up and register.
About the Author
Wesley Henderson is a business attorney with Henderson & Henderson law firm in Charleston SC. He focuses on helping businesses navigate their legal environment, including new owners opening any type of new business. Wesley can be reached by email.