How much is liability limited in an LLC?

I am a member of a non-profit (501c3) that is an LLC (at least I think we’re an LLC). We engage in what some might consider to be hazardous activity and sometimes non-club members join us. Let’s say we are a white water rafting club. If someone gets hurt or dies what kind of liability are the individual members facing? The club has insurance and waivers are signed by everyone. We have one member who feels that if a non-member gets hurt all the members could be sued individually, as well as the Board of Directors and the club as a whole. He has the deepest pockets and wants to stop taking non-members in our club boats. What say you? I am not seeking legal advice, just trying to find out how much (or little) protection the individual members of a non-profit LLC have.

Still, how at risk are the individual members?

NM then. :3

This is one of those legal questions that can’t be answered simply.

As a general rule, board members, officers, employees and even volunteers are assumed to be working on behalf of the corporation. Therefore, the corporation is liable and the individuals are usually held blameless.

However, there are many things that can disturb that delicate balance. If someone is committing a crime while in service of the corporation, they’re still on the hook individually. If they do something above and beyond their duties to the corporation, they’re still on the hook individually.

Some loans or bonds may also hold officers, board members or shareholders personally liable for repayment. (For example, this is standard procedure when small corporations obtain credit cards or leases). If the company was sued for killing a rafter, the board member might not be liable for the death, but could still be liable for paying on the loan (which the now-bankrupt corporation can’t pay itself).

In addition, some board members or officers may be liable to act reasonably. Reasonably is a word that covers a multitude of sins, but there are cases where shareholders have sued directors or officers of their corporation for failing to protect shareholder value. The deaths of WaMu and Enron result in lawsuits like that.

There are insurance policies specifically aimed at the legal liabilities of board members. These policies are in addition to the company’s own insurance policies, though some company pay the premiums on behalf of the board members.

If I were the board member in your specific case, I would talk to a lawyer about the potential liabilities in this case and ensure that the organization is taking reasonable precautions and has insurance policies that cover the foreseeable risks. Then I’d talk to an insurance agent to review the company’s insurance and to find out about a general umbrella policy or a policy related to his duties as a board member.

Your question is pretty close to asking a legal question. While IAAL, this is not legal advice, all other standard disclaimers apply.

A 501©(3) organization only has certain tax protection for its non-profit status. It does nothing for owner liability.

A LLC has certain protections, such that liability is limited to either a shareholder (depending on the operating agreement) or it’s limited to the assets of the organization (which can be distributed to another LLC or to the members at the end of the day).

I’d be surprised if your club is either a 501(c)(3)—a tax-exempt organization organized and operated exclusively for an exempt purpose* and for public, not private, benefit—and an LLC (since the IRS’s stance on 501(c)(3) LLCs requires that all members be themselves 501(c)(3) organizations or government instrumentalities).

There are other kinds of 501(c) organizations that your club might be. This is not pedantry: contributions to 501(c)(3) organizations are almost always tax deductible to the donor; those to other 501(c) organizations are usually not.

The upshot to all of this is that questions regarding non-profit status, taxation, and liability in tort require careful analysis and are easily misapprehended by those who are not familiar with business entity law. I’m sure your town has a local practitioner who would be glad to provide counsel to your club on these issues.

  • To wit: a charitable, religious, educational, scientific, or literary purpose, or testing for public safety, fostering national or international amateur sports competition, or preventing cruelty to children or animals. Your club does not appear, at first glance at least, to fall into any of these. Nor does it seem to have a public benefit; it is run for the benefit of the members.

Thanks for the replies. You are probably right about the status of the club regarding 501c(3) vs. 501c. I’ll have to look into that. I’ll need to gather my facts and talk to a lawyer. My main question is/was how feasible or likely is it that individual members could be sued for an accident in which someone was hurt/killed.

I don’t know about your specific situation, but it’s very common for a plaintiff to name all potentially negligent people and entities involved, claim the waiver was flawed in some way as to be invalid, and/or claim that even if a waiver is valid as to ordinary negligence, the conduct involved was gross negligence, which can’t be waived in some states. So, even if the individuals have some defense, they’re probably going to have to fight it out.

Got insurance?