Limited liability companies provide their owners with protection from business liabilities, but this protection is not immunity. If you have been wronged by someone who owns an LLC, you may wonder: can I sue someone even if they have LLC protection? The short answer is yes, you absolutely can. Understanding how LLC protection works clarifies your options.
Suing the LLC Directly
When your claim arises from the LLC’s business operations, the most straightforward approach is suing the LLC itself. The LLC is a legal entity that can sue and be sued in its own name.
Claims arising from business operations belong against the business entity. If the LLC breached a contract it signed, that is a claim against the LLC. If you were injured on the LLC’s business premises, that premises liability claim runs against the LLC. If an LLC employee caused you harm while acting within the scope of their employment, the LLC is responsible. Product liability claims for defective products sold by the LLC, employment claims brought by LLC employees, and general business negligence all proceed against the LLC.
If you obtain a judgment against the LLC, you can collect from the LLC’s assets. These include business bank accounts, equipment, accounts receivable, real estate owned by the LLC, and other business property. The LLC may also have insurance that covers your claim.
This path does not require you to reach the owner’s personal assets. Many claims can be fully satisfied from business assets and insurance proceeds.
Suing the Owner Personally for Their Own Conduct
LLC protection insulates owners from liability for the business’s actions, but it does not insulate them from liability for their own actions. This is a critical distinction.
If the owner personally committed negligence or wrongful conduct, you can sue the owner directly regardless of the LLC. The LLC form shields owners from vicarious liability for the acts of employees and co-owners. It does not shield them from direct liability for their own wrongdoing.
Consider examples. If the LLC owner personally defrauded you, that is a claim against the owner. If the owner personally committed malpractice, as with a doctor, lawyer, or accountant, the owner is personally liable for their own professional errors regardless of how their practice is structured. If the owner caused a car accident while driving for business purposes, the owner is personally liable for their own negligent driving.
The key question is whether the specific individual you want to sue personally did something wrong. If yes, their ownership of an LLC does not protect them from the consequences of their personal conduct.
Piercing the LLC Veil
Even for claims that would normally be limited to the LLC’s assets, courts can disregard the LLC structure and hold owners personally liable in certain circumstances. This doctrine is called “piercing the veil.”
Courts consider veil piercing when owners have abused the LLC form by treating it as their personal alter ego rather than as a separate entity. Factors that support veil piercing include commingling personal and business funds, failing to maintain the LLC as a separate entity with its own records and accounts, undercapitalizing the LLC so that it could never meet its foreseeable obligations, using LLC assets for personal purposes, and the owner’s complete domination and control of the LLC to perpetrate wrongdoing.
Veil piercing requires proving that the owner disregarded the separation that the LLC form is supposed to create. It is fact-intensive and not automatic. You must show that the owner abused the structure, not merely that they owned it.
Courts tend to be more receptive to veil piercing claims brought by tort victims than by contract creditors. The reasoning is that tort victims did not choose to do business with the LLC, while contract creditors had the opportunity to negotiate personal guarantees or other protections.
Personal Guarantees
Many business transactions require LLC owners to sign personal guarantees. Landlords commonly require personal guarantees on commercial leases. Lenders often require personal guarantees on business loans, particularly for newer or smaller businesses. Suppliers may require personal guarantees before extending credit.
When an owner has signed a personal guarantee, that owner is personally liable for the guaranteed obligation regardless of the LLC structure. The LLC’s limited liability does not override a contractual promise to pay.
If you have a contract with an LLC and the owner signed a personal guarantee, you can pursue the owner directly for the guaranteed amount. Review your contracts carefully to determine whether guarantees exist.
Claims That Bypass LLC Protection by Statute
Certain categories of claims reach through the LLC structure to owners by operation of law, regardless of whether the owner personally did anything wrong.
Federal tax obligations are a prime example. The IRS can pursue “responsible persons” for unpaid trust fund taxes, which are the employee portion of payroll taxes that the business collected but failed to remit. Under Internal Revenue Code Section 6672, individuals who had authority and responsibility to pay these taxes and willfully failed to do so are personally liable.
Environmental liability under certain statutes can reach owners and operators of facilities regardless of corporate structure. Employment tax liability can attach to individuals who control payroll decisions.
Fraud claims bypass LLC protection because the LLC form never shields fraudulent conduct. Criminal liability is also personal regardless of business structure.
What If the LLC Has No Assets?
Sometimes the LLC against which you have a claim has minimal assets. An LLC with no bank balance, no equipment, and no receivables may be effectively judgment-proof at the entity level.
In this situation, your options include pursuing veil piercing arguments if grounds exist, suing the owner directly for their personal conduct if applicable, identifying insurance coverage that may apply to your claim, and looking for other responsible parties.
Some business owners intentionally structure their affairs to hold valuable assets in entities separate from operating businesses that face liability risk. This is legal asset protection when done properly and in advance, but it can be frustrating for creditors.
If the owner transferred assets out of the LLC or to other entities after your claim arose or was foreseeable, those transfers may be voidable as fraudulent conveyances. An attorney can evaluate whether fraudulent transfer claims are viable.
The Charging Order Distinction
If you obtain a judgment against an LLC owner personally, rather than against the LLC, you may encounter charging order protection when trying to collect.
In states with strong charging order statutes like Wyoming, your remedy against a judgment debtor’s LLC membership interest is limited to a charging order. A charging order is a lien on distributions from the LLC. You receive whatever distributions the LLC makes to the owner, but you cannot seize the membership interest itself, cannot force the LLC to make distributions, and cannot become a member.
This limitation affects collection against the owner’s interest in LLCs they own. It does not prevent you from suing the LLC directly for the LLC’s own conduct, and it does not prevent you from suing the owner for their personal conduct.
Charging order protection is relevant primarily when you have a judgment against an individual and are trying to reach their investment assets held in LLC form.
Practical Considerations
Before pursuing litigation, investigate the potential defendant’s situation. Secretary of State filings may reveal what entities exist and some information about them. Property records show real estate ownership. UCC filings indicate secured debts that might affect asset availability. Identifying insurance coverage is often more productive than pursuing uninsured claims against limited assets.
Consulting with an attorney who can evaluate your specific facts is essential. The viability of veil piercing arguments, the existence of personal guarantees, the applicability of statutory liability, and other factors all depend on particular circumstances.
Conclusion
An LLC does not make its owner immune from lawsuits. You can sue the LLC directly for business-related claims. You can sue the owner for their own personal conduct. You may be able to pierce the veil if the owner abused the LLC structure. Personal guarantees and certain statutory claims bypass LLC protection entirely.
The LLC form provides meaningful protection to business owners when properly used and maintained. But it is not a barrier to all litigation, and understanding its limits helps you evaluate your options when you have been wronged.
For questions about business structuring and liability protection from the business owner’s perspective, consult Mark Pierce and Matt Meuli.