Reese was deeply concerned. She’d learned that the other member of her PLLC’s dental practice had received a demand letter from a lawyer representing one of their dental patients, claiming that the other member had committed malpractice, seriously injuring the patient. The member had promptly turned the demand letter over to their malpractice insurer to respond. But Reese knew that she and the other member had only been able to afford the minimum malpractice insurance limits. Would she end up getting sued, too, and having to pay a big judgment out of her personal assets?
Liability
An LLC can indeed be a significant tool to limit one’s liability. Liability simply means a financial obligation to another that civil law imposes as a consequence of a wrong of some kind. Liability isn’t necessarily a bad thing. We should be ready to compensate others whom we injure carelessly. What we shouldn’t have to face is unnecessary, excessive, uninsured liability that we could have avoided with reasonable and practical steps. An LLC limits an individual member’s liability by keeping the liability to the LLC and apart from the member. The LLC remains liable to pay for the wrong, but the liability does not pass through to the member.
Procedures
Liability is an obligation arising and owed between private parties. The government isn’t directly involved in liability claims, other than permitting its civil courts to hear and decide the claims. Instead, the injured or aggrieved party brings the claim against the alleged wrongdoer. The claimant typically begins by having a lawyer serve a demand on the alleged wrongdoer to pay the liability. The defending party turns the demand letter over to the insurer for the insurer to either pay the claim or retain an attorney to defend it. If the insurer refuses to pay the claim, the claimant’s attorney may file a civil lawsuit and pursue the case through the court’s civil procedures to a bench or jury trial and civil money judgment. Insurance pays the claim up to the insurance policy limits, leaving the defending party to pay any amount owed in excess of those limits.
Considerations
Whether an LLC is an effective tool in limiting liability depends on the type of liability, the liability theory, and the circumstances of the claim. The following sections address common liability types, theories, and circumstances. Liability law is complex, and the facts and circumstances of any one case can easily change the outcome. Take the discussion below as a general educational guide, not advice on the probable outcome of any specific matter.
Contracts
The first type of liability that an LLC can help a member limit is contract liability. The common contract liability theory is breach of contract, although the laws of the various states may recognize related theories like unjust enrichment, breach of an implied duty of fair dealing, fraudulent misrepresentation, and negligent or innocent misrepresentation. As mentioned in a chapter above, an LLC member limits contract liability to the LLC by not personally executing the contract or guaranteeing contract obligations. Keep the contract between the LLC and the other party, rather than between the LLC’s member or manager and the other party, and the contract liability should remain with the LLC, not the member or manager. Limiting liability for the other contract-related theories mentioned just above may depend on the member or manager not having been directly involved in the alleged misrepresentation or other wrong.
Capacities
You should see from the discussion immediately above that the law can regard an individual involved in an LLC’s business, as acting in more than one capacity. At one time, you may be acting for the LLC, at another time as the LLC manager’s, another time as the LLC’s member, and at other times in your individual capacity unrelated to any LLC role. Thus, to limit contract liability to the LLC, you should sign the contract under the clear indication that you are doing so as the LLC’s manager in your LLC role, not your individual role. When doing LLC business, stick to your LLC manager or employee role. Do not execute contracts in your individual capacity, or you’ll face personal contract liability.
Torts
A second type of liability that an LLC can help a member limit is tort liability. The word tort simply means a compensable wrong. Tort claims come in several forms or under several theories. Potential tort theories arising out of an LLC’s business can include ordinary negligence, motor-vehicle negligence, premises liability, products liability, defamation liability, and invasion of privacy liability. If the tort wrong occurred in the course of the LLC’s business, and you personally did not commit the tort wrong, then the tort law should limit liability to the LLC, protecting you personally. If, on the other hand, you committed the actual tort, even if in the course of the LLC’s business, then both you and the LLC would have the tort liability. You just wouldn’t have tort liability for torts committed by other LLC managers, members, or employees. You don’t get to avoid the consequences of your own wrongs, just liability for the wrongs of the LLC or others. On the other hand, if you personally committed a tort in the course of your work for the LLC, the LLC may owe you the obligation to indemnify and defend you. In that respect, an LLC can even help limit liability for your own wrongs.
Property
The ability of an LLC to limit premises liability to the LLC, rather than extending liability to its members, make an LLC an especially useful business entity form for owning and managing real property. Many individuals who wish to own and manage real properties do so by putting each property into its own LLC. The LLC owns and controls the property. The LLC thus has premises liability for anyone injured on it by negligence or a defect. The LLC passes the property’s rent or other income through to the LLC’s members, who have no premises liability. By putting each property into its own LLC, a mortgage lender or tort creditor against the LLC can reach only the LLC’s own insurance and, if the loss exceeds insurance, only the LLC’s own asset, which is the single property. The creditor cannot reach the members or other properties the members own through other LLCs. In effect, multiple LLCs, one for each property, avoid the cross-collateralization risk where a loss on one property may trigger the loss of other properties.
Insurance
An LLC is only one tool among other tools for avoiding liability. Insurance is another tool, not (technically speaking) for limiting liability but instead for reducing its impact on the responsible party. Insurance is a contract in which the insurer promises to pay for liability that certain of the insured party’s wrongs create. LLCs often purchase a commercial general liability (CGL) policy providing coverage for wrongs like premises liability and ordinary negligence. They may also purchase products liability coverage, malpractice coverage, coverage for advertising injuries, motor-vehicle coverage, and other liability coverages, as riders to the CGL policy or as separate policies. Get a good independent insurance agent to help you choose the right coverages at the best price from the right companies. Insurance coverages generally also provide for the cost of defending the proceeding, which is a significant and valuable benefit.
Intention
An LLC does not limit, and insurance will not cover, some intentional torts that a wrongdoer could conceivably commit around an LLC’s business. Those intentional torts include assault, battery, false imprisonment, intentional infliction of emotional distress (IIED), embezzlement, and conversion. If your LLC’s manager, member, or employee commits those intentional wrongs, the wrongdoer will have tort liability for the harm, even if relating to the LLC’s business. And insurance will not pay for the defense or indemnity of those wrongs. Whether the LLC has liability for the wrongdoer’s intentional wrong is a close question involving theories of vicarious liability.
Malpractice
If you operate a PLLC offering your services as a licensed professional and the services of other licensed professionals in the same profession, then your PLLC may also face malpractice liability. Malpractice is a tort claim for a breach of the professional standard of care by a licensed professional that causes loss or injury. Medical malpractice, nursing malpractice, legal malpractice, engineering malpractice, and accounting malpractice are example malpractice theories. Licensed professionals may generally not limit their own malpractice liability. Both the licensed professional and PLLC of which the professional is an employee or member would have malpractice liability. Other members of the same PLLC, though, would not share that professional liability. Get sound and experienced legal advice if you have liability questions relating to your LLC or PLLC.
Key Points
An LLC can in certain cases limit a member’s liability to the LLC.
An LLC can limit contract liability to the LLC, for LLC contracts.
An LLC can limit certain tort liabilities to the LLC.
A wrongdoer is liable for their own wrongs but not others’ wrongs.
An LLC may owe a manager or employee indemnity for wrongs.
Insurance is another way of reducing liability’s impact.