{"id":368945,"date":"2021-09-30T14:48:05","date_gmt":"2021-09-30T19:48:05","guid":{"rendered":"https:\/\/content.findlaw-admin.com\/ability-law\/litigation\/filing-a-lawsuit\/can-i-sue-the-owner-of-an-llc.html"},"modified":"2024-01-08T13:52:26","modified_gmt":"2024-01-08T18:52:26","slug":"can-i-sue-the-owner-of-an-llc","status":"publish","type":"page","link":"https:\/\/www.findlaw.com\/litigation\/filing-a-lawsuit\/can-i-sue-the-owner-of-an-llc.html","title":{"rendered":"Can I Sue the Owner of an LLC?"},"content":{"rendered":"\n
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Can I Sue the Owner of an LLC?<\/h1>\n
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\n By Steven Ellison, Esq.<\/a> | Legally reviewed by Joseph Fawbush, Esq.<\/a>\n | Last reviewed\n
\n \n <\/i>\n Legally Reviewed\n <\/summary>\n\n
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This article has been written and reviewed for legal accuracy, clarity, and style by FindLaw\u2019s team of legal writers and attorneys<\/a> and in accordance with our editorial standards<\/a>.<\/em><\/p>\n\n <\/div>\n <\/details>\n\n

\n \n <\/i>\n Fact-Checked\n <\/summary>\n\n
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The last updated date refers to the last time this article was reviewed by FindLaw or one of our contributing authors<\/a>. We make every effort to keep our articles updated. For information regarding a specific legal issue affecting you, please contact an attorney in your area<\/a>.<\/em><\/p>\n\n <\/div>\n <\/details>\n<\/section>\n

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Yes, in certain instances. The general rule is that the owners, or members, of an LLC are not personally liable for the debts of the business. Yet, they may be found liable in at least two situations.<\/p>\n\n <\/div>\n\n

The first scenario is when they personally guaranty the debt. The second scenario, in very limited circumstances, is when a court decides to \u201cpierce the corporate veil" and hold them personally liable.<\/p>\n

To know whether you can sue an owner, you’ll need to understand how an LLC works<\/a>. You can then read about when a lawsuit<\/a> is possible. <\/p>\n

Or, you can discuss your case with an attorney near you<\/a> for advice.<\/p>\n

<\/a>What Is an LLC?<\/h2>\n

An LLC<\/a>, or limited liability company, is a business structure created by state law. The owners are called members. Most states do not restrict ownership, so members can be people, corporations<\/a>, or other LLCs.<\/p>\n

Although a few types of businesses, such as banks and insurance companies, cannot operate as LLCs, you can otherwise do almost any type of legal business in that form.<\/p>\n

How Do You Form an LLC?<\/h3>\n

Specific requirements vary from state to state, but forming an LLC is simple.<\/p>\n

First, you choose the LLC’s name. Then you file articles of organization<\/a>, which establish the rights, powers, liabilities, and other obligations of the LLC’s members. Next, you provide certain business information, including the business’s address, the name and address of the LLC’s registered agent<\/a>, and the names and addresses of the members of the LLC. Pay the filing fee, and don’t forget to get an Employer Identification Number<\/a> (EIN) from the IRS.<\/p>\n

With that, you’re done. This can be done online; you don’t need a law firm.<\/p>\n

Why Is an LLC Beneficial?<\/h3>\n

There are several reasons why business owners choose to do business as an LLC, particularly single-member LLCs. The primary reason is asset protection. The law recognizes an LLC as a separate legal entity in its own right. This acts as a liability shield for individual members. In general, the members of an LLC are not responsible for the debts of the LLC and enjoy personal liability protection if the LLC fails. That means that if the business folds, your personal assets, such as your house, are not at risk.<\/p>\n

Another reason is that doing business as an LLC provides more flexibility, particularly to entrepreneurs, small businesses, and sole proprietorships, with fewer administrative inconveniences than other legal entities. For example, an LLC does not have to observe all the formalities that a corporation does, such as installing a board of directors or holding shareholder meetings.<\/p>\n

A third reason is the tax benefit. Other business entities, such as corporations, face double taxation. That’s where a corporation pays tax on its income, and then the shareholders pay income tax on any dividends. So money paid to the shareholders is taxed twice. On the other hand, for an LLC there can be \u201cpass through" taxation.<\/a> This allows your share of the profits to be taxed a single time on your own tax return. More money in your pocket.<\/p>\n

A fourth reason is that an LLC enjoys great flexibility in determining how profits and losses are shared by the members. LLCs with more than one member often have an operating agreement<\/a>. In that operating agreement, the members can set out how they want to divide the profits and losses. <\/p>\n

For example, you may have a two-member LLC in which one member puts up most of the money, but the other member spends most of their time doing the work of the business. That operating agreement could take each member’s contributions into account in a manner they decide and not just as a 50-50 split.<\/p>\n

<\/a>When Can I Sue an LLC?<\/h2>\n

Suppose you make phenomenal donuts and feel a moral obligation to make them available to the world. You make a contract with a donut shop, a limited liability company with one member, to sell them. You’re up all night, kneading feverishly, and bring your donuts to the shop in the morning. After your delivery, you dust the flour off your hands, take a shower, and go to bed. Job well done.<\/p>\n

Later that day, you call the shop and ask how the donuts sold. Like gangbusters, you are told. You say great, and only then remember to ask when they’re going to pay you. They tell you that the check is in the mail. Great.<\/p>\n

Of course, the check never arrives. You need that money, so you sue the shop and get a judgment. You try to collect on it, only to find that the shop has closed and has no money to pay you. Where’s the member of the LLC? On a yacht off the shores of Tahiti.<\/p>\n

Although the general rule is that the members of an LLC are not personally liable for its debts \u2013 after all, that is the primary reason businesses operate as LLCs in the first place \u2013 there are two exceptions to this general rule. So you might have a chance to recover.<\/p>\n

When the Members Personally Guaranty the LLC’s debts<\/h3>\n

The first involves personal guaranties. A guaranty<\/a> is an agreement to be responsible for someone else’s debt. It is, for all essential purposes, a contract. If the person you guaranteed fails to pay a debt, then you can be sued for breach of contract. When doing business with an LLC, many people and companies insist that the member or members of the LLC agree to be personally responsible just in case the LLC goes belly up.<\/p>\n

If you didn’t get a personal guaranty, that does not mean you’re doomed. Although it’s a steep uphill battle and states’ laws vary, you may be able to persuade a court to pierce the corporate veil<\/a> and hold the member responsible for the money the LLC owes you.<\/p>\n

When the Circumstances Support Piercing the Corporate Veil<\/h3>\n

The phrase piercing the corporate veil refers to a situation in which a court decides to disregard the fact that the LLC is a legal entity separate from its members. It throws out the liability protection an LLC provides, which results in the imposition of personal liability on the LLC’s members.<\/p>\n

Courts do not do this as a matter of course, as it’s a rare occurrence. If you raise this issue, you will have a battle on your hands as this is the most litigated issue in business law.<\/p>\n

Why Might a Court Pierce the Corporate Veil?<\/h3>\n

So why might a court pierce the corporate veil? The main reason is fraud. If a court believes that a member of an LLC, by word or deed, led you to believe that they personally would be on the hook for a debt, it might decide to pierce the veil and hold the member personally liable.<\/p>\n

Another reason is fundamental fairness. To most people, it just feels wrong for you to be out the money for the donuts while the person who benefitted from your hard work tans on a yacht. If a court thinks it is fundamentally unfair for you to have to bear a loss in a particular situation, it may consider holding the LLC member liable.<\/p>\n

What Does a Court Look at When Piercing the Corporate Veil?<\/h3>\n

The decision to pierce the corporate veil is fact-specific, and the relevant factors vary from state to state. In general, courts look at the following things:<\/p>\n