Does an LLC Protect Personal Assets in Case of a Lawsuit?

business owners

One of the benefits of owning an LLC in Michigan is the protection of your personal assets from any legal matters that arise from your business. Limited liability companies, so named because they protect business owners from direct legal action, will be held responsible for any wrongful acts committed by your co-owners or employees. Thus, even if the LLC is found liable for negligence or wrongdoing because of the actions of a co-owner or employee, your personal assets are typically protected.

Although an LLC’s money or property may be taken by creditors to satisfy a judgment against it, the LLC owners would not typically be personally liable for that debt. This changes, however, if you, as the owner, are the party responsible for the negligence or wrongdoing. In other words, you can be held personally responsible for your actions even if you have an LLC.

The following scenarios show how this might look in real life.

Setting Up the Scenarios

We will explore the limitations of an LLC by imagining a fictitious “John Doe” who owns John Doe’s Home Inspections, LLC. John employs two other home inspectors through his LLC.

Jane Doe contracts with the LLC for a home inspection of a house she intends to purchase.

When John Doe Cannot Be Held Liable

John sends Employee 1 to inspect the home. Employee 1 gives Jane an inspection report that fails to properly report that the skylights are leaking water. After Jane purchases the home, she discovers the leaking skylights and other damage caused by these leaks. Jane can now sue the LLC.

Assuming she wins, the LLC would be liable for any damages awarded to her. What is important here is that John, as the owner, cannot be sued personally, and even if Jane gets a judgment against the LLC, John’s personal assets—such as his home—are protected.

It should be noted that Employee 1 could be sued individually because they conducted the faulty inspection. This is not common, however, because many employees are not collectible.

When John Doe Can Be Held Liable

John inspects Jane’s home personally instead of sending one of the LLC’s employees. In this case, Jane can sue both John and the LLC because John personally performed the home inspection. In other words, John can be held liable for his personal negligence in not properly inspecting the home. This is separate and distinct from the LLC’s liability as the contracting party.

If you look back to the previous scenario, you will notice Jane has the right to sue Employee 1 if she wants. John is liable under the same logic that holds an individual accountable for their actions.

Will Jane sue John? It depends. However, since he is a business owner, he may have substantially more assets than any of his employees, which could induce Jane to file a suit.

Understanding the LLC Exception

Scenario 2 lays out the significant exception to the “limited liability” part of an LLC. If you own an LLC, you will remain personally liable for any wrongdoing you commit while conducting your LLC’s business.

Therefore, although LLCs are great tools to shield owners from personal liability for their employees’ or co-owners’ actions, an individual who owns an LLC is still personally liable for their conduct. If you have questions on how to best protect yourself and your business, reach out to one of our business lawyers today.

Schedule a free consultation with Grewal Law PLLC by calling us at (888) 211-5798. We are experienced in all types of complex commercial and business litigation.

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