How Limited is a Member’s Liability in an LLC?

When a business owner is forming an LLC, one of the first questions is usually what is a member’s liability in an LLC? LLC stands for Limited Liability Company. Formation of LLCs has gained popularity over the past decade since the Florida Legislature repealed the 5.5% Florida corporate tax. A Limited Liability Company entity structure provides flexibility with taxation. It also gives its members (also known as owners) the ability to develop highly customized rules and procedures for the business using an operating agreement while limiting liability.

Liability Protection according to Florida Statutes

Florida Statute §605 governs the liability of members and managers of an LLC. Florida Statute §605.0304 states that a debt, obligation, or other liability of a limited liability company is solely the liability of the company. Meaning that under the statute that members and managers are not liable even in the event of the dissolution of the company. The Florida Revised Limited Liability Company Act (the LLC Act) effective since January 1, 2015, extends liability protection to when the member/manager has not observed the corporate/company formalities in the revised version of Florida Statute §605.0304(2). However, while Florida provides strong statutory liability protection, it is not absolute.

Exceptions to Protection from Liability

The following are the most well-known exceptions to the liability protection afforded to members/managers by the LLC entity structure:

1. Member’s written consent to be liable for the obligation;
2. Two-year clawback of improper distributions under Florida Statutes §605.0405 and 605.0506;
3. Provisions in agreements signed before the organization of the LLC entity that provide for member/manager liability;
4. Tortious conduct by member or manager;
5. An action or inaction of the member/manager results in a violation of criminal law or improper personal gain;
6. Liability that exists under Federal Tax or Florida Sales and Use Tax laws;
7. Violation of fiduciary duties to creditors that operates in the vicinity of insolvency; in other words, a member/manager acting in a self-serving manner to the detriment of creditors.

What is Piercing the Corporate [LLC] Veil Mean?

Piercing the corporate [LLC] veil refers to when a court will disregard the statutory protections that provided for the limited liability of a member or manager. A creditor can only pursue this remedy after obtaining a judgment against the company, and there is no satisfaction of the same. Reaching the members or managers of the company for the satisfaction of the company’s judgment requires the plaintiff (the creditor) has the burden to show that the company/corporate entity should be disregard on the basis that:

1. Member and/or manager exercises control of the entity and fails to observe LLC formalities; AND
2. There is improper conduct by the [member(s) and/or manager(s)]; AND
3. That improper conduct is the proximate cause (an event sufficiently related to an injury) of the loss that is the basis for the judgment that the plaintiff is seeking to be satisfied.

Dania Jai–Alai Palace, Inc. v. Sykes, 450 So.2d 1114, 1120 (Fla.1984) ; Houri v. Boaziz, 196 So. 3d 383, 390 (Fla. Dist. Ct. App. 2016).

An LLC provides excellent protection for members/managers when the strong Florida Statutes are coupled with a clear and complete operating agreement. Ideally, the operating agreement should let members, and if applicable, managers and creditors that require disclosure in reliance before extending credit, know precisely the member/manager duties, authorized conduct for member/managers, and detailed procedures for the operation of the business.