# Just how limited is the liability in an LLC? **URL:** \ **Category:** Factual Questions\ **Created:** [April 22, 2007, 10:20pm UTC](https://boards.straightdope.com/t/just-how-limited-is-the-liability-in-an-llc/401210 "2007-04-22T22:20:40Z")\ **Posts on this page:** 20\ **Page:** 1
**Author:** ![Zsofia](https://avatars.discourse-cdn.com/v4/letter/z/7bcc69/32.png) [@Zsofia](https://boards.straightdope.com/u/Zsofia)\ **Post date:** [April 22, 2007, 10:20pm UTC](https://boards.straightdope.com/t/just-how-limited-is-the-liability-in-an-llc/401210/1 "2007-04-22T22:20:40Z")
I’ve posted a few threads asking for help with some aspects of the business my boyfriend really wants me to start with him. Now, I’ve got a few reservations on this thing, ya know? I have a house and _stuff_, while he lives in a shack down by the railroad tracks and all of his valuable stuff is technically owned by his other business. So my question is, if we incorporate as an LLC and take out a business loan, if things go south can I lose my house? I mean, it _can’t_ be that you just incorporate, take out a huge farking loan (somebody’s really gonna give us _half a million dollars_?! What a moron!) and if you go bankrupt the corporation files for bankruptcy and we walk away scott free as long as we didn’t actually steal or cheat. Right? I mean, if that were the case wouldn’t everybody who’s willing to put the work in start a business with a great big loan? Also, is this the kind of thing that varies by state? ---
**Author:** ![Polycarp](https://avatars.discourse-cdn.com/v4/letter/p/82dd89/32.png) [@Polycarp](https://boards.straightdope.com/u/Polycarp)\ **Post date:** [April 22, 2007, 10:37pm UTC](https://boards.straightdope.com/t/just-how-limited-is-the-liability-in-an-llc/401210/2 "2007-04-22T22:37:33Z")
_ **If I understand it correctly** _, an LLC is a separate legal person incorporated under the laws of some state and, for the moment anyway, recognized as a discrete legal person in every other state under the Full Faith and Credit clause of the Constitution. (I say “for the moment anyway” because FF&C is rapidly being riddled with exceptions based on “the public policy of the state” – and any three lawyers you talk to will have five different opinions on what exactly that means.) That means that the LLC’s liability is limited to what it owns as a corporation – and if you and your boyfriend are the members of the LLC, that means precisely what the two of you officially put into its ownership. If someone is prepared to loan a new and undercapitalized LLC a half million dollars, he’s either a high-stakes gambler venture capitalist with money to spare or not playing with a full deck. But your personal loss will be delimited to what you transfer from ownership by [**Zsofia** ’s real name], a natural person, to _Zsofia and Boyfriend, LLC_, a corporate legal person. And I stress that you need to be sure of the legality of the LLC to be sure of that protection, because it would be very easy for a court looking for a way to reimburse debtors in a bankruptcy that appears to involve fraud to find that ownership by an out-of-state LLC not registered with the Secretary of State of your state to do the specific business planned constitutes a violation of “public policy” and hence is not covered by FF&C, and there goes your limited liability. I am not a lawyer, that is not legal advice, and you should rely on it almost as firmly as you do on that list of trivia that begins “A duck’s quack does not echo.” But **do** talk to a lawyer, in person, with the details of what you plan to do. ---
**Author:** ![boygenius](https://avatars.discourse-cdn.com/v4/letter/b/c68b51/32.png) [@boygenius](https://boards.straightdope.com/u/boygenius)\ **Post date:** [April 22, 2007, 10:39pm UTC](https://boards.straightdope.com/t/just-how-limited-is-the-liability-in-an-llc/401210/3 "2007-04-22T22:39:05Z")
No bank is gonna lend a startup LLC half a million dollars without a personal guarantee. And your boyfriend is gonna screw up the business and leave you holding the bag. ---
**Author:** ![Zsofia](https://avatars.discourse-cdn.com/v4/letter/z/7bcc69/32.png) [@Zsofia](https://boards.straightdope.com/u/Zsofia)\ **Post date:** [April 22, 2007, 10:41pm UTC](https://boards.straightdope.com/t/just-how-limited-is-the-liability-in-an-llc/401210/4 "2007-04-22T22:41:21Z")
Well, that’s a little unfair. He’s doing quite well in his own business, but that didn’t require a loan for startup. ---
**Author:** ![boygenius](https://avatars.discourse-cdn.com/v4/letter/b/c68b51/32.png) [@boygenius](https://boards.straightdope.com/u/boygenius)\ **Post date:** [April 22, 2007, 10:47pm UTC](https://boards.straightdope.com/t/just-how-limited-is-the-liability-in-an-llc/401210/5 "2007-04-22T22:47:16Z")
[QUOTE=Zsofia] Well, that’s a little unfair. He’s doing quite well in his own business, but that didn’t require a loan for startup. [/QUOTE] So why can’t he just expand his current business? Why does he need your involvement? Have you looked at his books? I can’t tell you how many “businesses” I’ve seen run by “boyfriends” that turned out to be \*\*\*\*. ---
**Author:** ![Fear\_Itself](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/fear_itself/32/19637_2.png) [@Fear\_Itself](https://boards.straightdope.com/u/Fear_Itself)\ **Post date:** [April 22, 2007, 10:48pm UTC](https://boards.straightdope.com/t/just-how-limited-is-the-liability-in-an-llc/401210/6 "2007-04-22T22:48:18Z")
[QUOTE=Zsofia] Well, that’s a little unfair. He’s doing quite well in his own business… [/QUOTE] That accounts for the shack down by the railroad tracks. ---
**Author:** ![Zsofia](https://avatars.discourse-cdn.com/v4/letter/z/7bcc69/32.png) [@Zsofia](https://boards.straightdope.com/u/Zsofia)\ **Post date:** [April 22, 2007, 10:54pm UTC](https://boards.straightdope.com/t/just-how-limited-is-the-liability-in-an-llc/401210/7 "2007-04-22T22:54:50Z")
Well, dude, he just started it last year. He’s been pretty much hitting the benchmarks the two of them set out in their business plan, and he’s been making rent on the shack. This is a different business - he’s doing pretty well in his video production line, and now he wants to start an arcade. I mean, we’re just in the exploratory stages - writing a business plan, looking for funding. Nobody’s going to give us any money if it isn’t a solid plan. ---
**Author:** ![Gfactor](https://avatars.discourse-cdn.com/v4/letter/g/9de053/32.png) [@Gfactor](https://boards.straightdope.com/u/Gfactor)\ **Post date:** [April 22, 2007, 10:55pm UTC](https://boards.straightdope.com/t/just-how-limited-is-the-liability-in-an-llc/401210/8 "2007-04-22T22:55:35Z")
It’s what others have said. An LLC Member is not liable for the LLC’s debts. A lender will, of course, be aware of this rule. If the LLC has no liquid cash reserves and no proven payment record, the lender is looking at an entity that might not pay and might not have any assets to collect against if the debt goes unpaid. They’re gonna ask for a personal guaranty. Once you sign that, you’re on the hook for the debt. See Section 303: [http://www.assetprotectionbook.com/ullca96.pdf](http://www.assetprotectionbook.com/ullca96.pdf) [You are being redirected...](http://www.poynerspruill.com/infocenter/General_Corporate/succplan.asp) _And see_, [http://www.firstam.com/ekcms/uploadedFiles/firstam\_com/References/Reference\_Articles/John\_C\_Murray\_Reference/Limited\_Liability\_Companies/limited-liab-bankruptcy.pdf](http://www.firstam.com/ekcms/uploadedFiles/firstam_com/References/Reference_Articles/John_C_Murray_Reference/Limited_Liability_Companies/limited-liab-bankruptcy.pdf) ---
**Author:** ![Keeve](https://avatars.discourse-cdn.com/v4/letter/k/f07891/32.png) [@Keeve](https://boards.straightdope.com/u/Keeve)\ **Post date:** [April 22, 2007, 11:09pm UTC](https://boards.straightdope.com/t/just-how-limited-is-the-liability-in-an-llc/401210/9 "2007-04-22T23:09:35Z")
Interesting thread, thanks. But if it is accurate, then what’s the difference between an LLC and a regular Corporation? Can someone point me to a primer on this stuff? Just curious. Thanks! ---
**Author:** ![boygenius](https://avatars.discourse-cdn.com/v4/letter/b/c68b51/32.png) [@boygenius](https://boards.straightdope.com/u/boygenius)\ **Post date:** [April 22, 2007, 11:10pm UTC](https://boards.straightdope.com/t/just-how-limited-is-the-liability-in-an-llc/401210/10 "2007-04-22T23:10:58Z")
[QUOTE=Zsofia] He’s been pretty much hitting the benchmarks the two of them set out in their business plan, and he’s been making rent on the shack. [/QUOTE] Ask to look at his books. I bet you he gets all defensive and insinuates that you must not really love/trust him if you want to review his records. ---
**Author:** ![Gfactor](https://avatars.discourse-cdn.com/v4/letter/g/9de053/32.png) [@Gfactor](https://boards.straightdope.com/u/Gfactor)\ **Post date:** [April 22, 2007, 11:20pm UTC](https://boards.straightdope.com/t/just-how-limited-is-the-liability-in-an-llc/401210/11 "2007-04-22T23:20:11Z")
[QUOTE=Zsofia] I mean, it _can’t_ be that you just incorporate, take out a huge farking loan (somebody’s really gonna give us _half a million dollars_?! What a moron!) and if you go bankrupt the corporation files for bankruptcy and we walk away scott free as long as we didn’t actually steal or cheat. Right? I mean, if that were the case wouldn’t everybody who’s willing to put the work in start a business with a great big loan? [/QUOTE] Problem is, as I pointed out above, lenders know about the limited liability thing too. They’re going to develop a strategy that will increase the likelihood that they’ll get their money back. > [@](#): > > Also, is this the kind of thing that varies by state? Not so much, actually. > [@](#): > > Starting with the pioneering state of Wyoming in 1977, and ending with the Hawaii legislature in 1996, every state has, in recent years, now passed laws creating a new type of legal entity called a “limited liability company” (or LLC). These new entities, which resemble (and are usually taxed as) partnerships, offer the advantages of limited liability, like corporations. While it has long been possible for partnerships to offer limited liability to their LIMITED partners, a limited partnership always had to have at least one GENERAL partner, who was fully liable for the debts of the business. [Limited Liability Companies -- The Basics](http://www.roninsoft.com/llc.htm) [QUOTE=Keeve] Interesting thread, thanks. But if it is accurate, then what’s the difference between an LLC and a regular Corporation? Can someone point me to a primer on this stuff? Just curious. Thanks! [/QUOTE] The links that I’ve posted so far would be a good start. Also, the nolo press page is good: [http://www.nolo.com/article.cfm/catId/5DE04E60-45BB-4108-8D757E247F35B8AB/objectId/2C1A52D5-9364-4F92-AD191B56DF9D4CE6/111/182/ART/](http://www.nolo.com/article.cfm/catId/5DE04E60-45BB-4108-8D757E247F35B8AB/objectId/2C1A52D5-9364-4F92-AD191B56DF9D4CE6/111/182/ART/) ---
**Author:** ![Zsofia](https://avatars.discourse-cdn.com/v4/letter/z/7bcc69/32.png) [@Zsofia](https://boards.straightdope.com/u/Zsofia)\ **Post date:** [April 22, 2007, 11:41pm UTC](https://boards.straightdope.com/t/just-how-limited-is-the-liability-in-an-llc/401210/12 "2007-04-22T23:41:48Z")
[QUOTE=boygenius] Ask to look at his books. I bet you he gets all defensive and insinuates that you must not really love/trust him if you want to review his records. [/QUOTE] He has no problems with me seeing his books. Do you have some sort of past trauma here you’d like to disclose? ---
**Author:** ![Gfactor](https://avatars.discourse-cdn.com/v4/letter/g/9de053/32.png) [@Gfactor](https://boards.straightdope.com/u/Gfactor)\ **Post date:** [April 23, 2007, 12:00am UTC](https://boards.straightdope.com/t/just-how-limited-is-the-liability-in-an-llc/401210/13 "2007-04-23T00:00:13Z")
[QUOTE=Keeve] Interesting thread, thanks. But if it is accurate, then what’s the difference between an LLC and a regular Corporation? Can someone point me to a primer on this stuff? Just curious. Thanks! [/QUOTE] On second thought, the links don’t necessarily give the historical context. Here’s a quick summary. Corporations were created to permit those with business ambitions to get investors–that’s one part of it anyway. Investors who were strangers to the business weren’t too keen on supporting the business if they thought they could be held liable for the company’s debts. So early corporations were chartered by states for limited purposes. They were permitted to sell shares, which could in turn be traded by investors. What made the shares attractive was that shareholders who weren’t involved in the management of the company had limited liability. The worst they could do was lose their investment. In order to further protect shareholders, while limiting their direct involvement, states created a form of representation in corporations. Corporations had boards of directors, who were elected by the shareholders. The shareholders met periodically, voted on the board, which hired officers, who hired employees, who did the grunt work, while the officers and directors actually ran the company. If the shareholders didn’t like the way things were going, they could replace the board, which could, in turn appoint new officers, who could change the course of the business. This was fine for companies that sought investments from strangers, but it was designed for businesses where the owners didn’t run the company. There was another form of entity called a partnership. Partnerships were owned by the partners, who also ran them. They weren’t subject to the same requirements as corporations. But they also didn’t offer limited liability. As it became easier to get corporate charters, those whose businesses were like partnerships (Bill and Joe buy a store together and run it–there are no investors) incorporated their businesses in order to limit personal liability. While this was fine in most states, the formalities made it more expensive and sometimes a bit absurd (do I really need to have a board of directors meeting with Joe, who I see every stinking day? Do I need to document the meeting?) This got even crazier when states began permitting single shareholder/director corporations. LLCs were developed as a solution to some of these problems. LLCs are structured more like partnerships than corporations (no shareholders, no directors) but they offer the limited liability of a corporation. Sometimes a corporation will better serve the needs of the principals, so it makes sense to talk to a professional while you trying to decide which entity to form. As I said, this is a quick summary of the history of just one small aspect of the evolution of LLCs, there’s a lot more to it, and I’m probably overgeneralizing and missing stuff. ---
**Author:** ![Gfactor](https://avatars.discourse-cdn.com/v4/letter/g/9de053/32.png) [@Gfactor](https://boards.straightdope.com/u/Gfactor)\ **Post date:** [April 23, 2007, 12:46am UTC](https://boards.straightdope.com/t/just-how-limited-is-the-liability-in-an-llc/401210/14 "2007-04-23T00:46:00Z")
Responding to the thread title, liability is pretty limited: > [@](#): > > SECTION 303. LIABILITY OF MEMBERS AND MANAGERS. > > ``` > (a) Except as otherwise provided in subsection (c), the debts, obligations, and liabilities of a limited liability company, whether arising in contract, tort, or otherwise, are solely the debts, obligations, and liabilities of the company. A member or manager is not personally liable for a debt, obligation, or liability of the company solely by reason of being or acting as a member or manager. > > (b) The failure of a limited liability company to observe the usual company formalities or requirements relating to the exercise of its company powers or management of its business is not a ground for imposing personal liability on the members or managers for liabilities of the company. > > (c) All or specified members of a limited liability company are liable in their capacity as members for all or specified debts, obligations, or liabilities of the company if: > > (1) a provision to that effect is contained in the articles of organization; and > > (2) a member so liable has consented in writing to the adoption of the provision or to be bound by the provision. > > ``` [http://www.law.upenn.edu/bll/ulc/fnact99/1990s/ullca96.htm](http://www.law.upenn.edu/bll/ulc/fnact99/1990s/ullca96.htm) You mustn’t forget, though, that LLC members remain liable for their own torts and contracts. [http://www.jamesmartinpa.com/suellcmember.html](http://www.jamesmartinpa.com/suellcmember.html) ---
**Author:** ![Scuba\_Ben](https://avatars.discourse-cdn.com/v4/letter/s/278dde/32.png) [@Scuba\_Ben](https://boards.straightdope.com/u/Scuba_Ben)\ **Post date:** [April 23, 2007, 1:32am UTC](https://boards.straightdope.com/t/just-how-limited-is-the-liability-in-an-llc/401210/15 "2007-04-23T01:32:35Z")
**boygenius** made a good point in passing: Treat investing in a start-up business with people you are close to with MORE diligence, research, and caution than you would treat investing in a Fortune 500 company’s stock. Two reasons for this: 1. A start-up business is extremely high risk. It could become the next megasuccess; it could (with higher statistical history) become a total loss. 2. Going into business with a friend or relative puts an added strain on the relationship, a strain that may cloud sound business judgement. I suggest you read the article “Take a FLIER on a friend?” in the April 2007 issue of _Kiplinger’s_. ---
**Author:** ![ouryL](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/ouryl/32/6067_2.png) [@ouryL](https://boards.straightdope.com/u/ouryL)\ **Post date:** [April 23, 2007, 7:38am UTC](https://boards.straightdope.com/t/just-how-limited-is-the-liability-in-an-llc/401210/16 "2007-04-23T07:38:15Z")
Just as long as you understand what liability means. You still do not escape personal liability. ---
**Author:** ![Keeve](https://avatars.discourse-cdn.com/v4/letter/k/f07891/32.png) [@Keeve](https://boards.straightdope.com/u/Keeve)\ **Post date:** [April 23, 2007, 10:34am UTC](https://boards.straightdope.com/t/just-how-limited-is-the-liability-in-an-llc/401210/17 "2007-04-23T10:34:11Z")
**Gfactor** , thanks! ---
**Author:** ![Balthisar](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/balthisar/32/2825_2.png) [@Balthisar](https://boards.straightdope.com/u/Balthisar)\ **Post date:** [April 23, 2007, 11:58am UTC](https://boards.straightdope.com/t/just-how-limited-is-the-liability-in-an-llc/401210/18 "2007-04-23T11:58:01Z")
[QUOTE=Keeve] But if it is accurate, then what’s the difference between an LLC and a regular Corporation? Can someone point me to a primer on this stuff? Just curious. Thanks! [/QUOTE] That’s been answered, but what about a company operating as “Ltd.”? To me in Michigan, this whole “LLC” is still “fresh” in my memory, as they starting cropping up sometime in the 1990’s. Prior to that, though, I recall many businesses operating as “Ltd.” which I’d always assumed was some type of limited liability company. I don’t see (or notice) these any more. Was this just a change in terms in Michigan to bring us up to speed with the rest of the country, or was this (or is this still) something else altogether? ---
**Author:** ![Zsofia](https://avatars.discourse-cdn.com/v4/letter/z/7bcc69/32.png) [@Zsofia](https://boards.straightdope.com/u/Zsofia)\ **Post date:** [April 23, 2007, 1:10pm UTC](https://boards.straightdope.com/t/just-how-limited-is-the-liability-in-an-llc/401210/19 "2007-04-23T13:10:15Z")
I appreciate all the good, comprehensive answers here. It still boggles my mind that if you can get somebody to lend you the money, and you don’t defraud anybody, you can walk away scot free as long as you haven’t taken on any personal debts. Crazy! And of course the perils of going into business with somebody I’m close to is something I’ve been thinking about (he doesn’t want to get married, but he does want to start a business?) and will take carefully into consideration. ---
**Author:** ![Gfactor](https://avatars.discourse-cdn.com/v4/letter/g/9de053/32.png) [@Gfactor](https://boards.straightdope.com/u/Gfactor)\ **Post date:** [April 23, 2007, 2:49pm UTC](https://boards.straightdope.com/t/just-how-limited-is-the-liability-in-an-llc/401210/20 "2007-04-23T14:49:05Z")
[QUOTE=Balthisar] That’s been answered, but what about a company operating as “Ltd.”? To me in Michigan, this whole “LLC” is still “fresh” in my memory, as they starting cropping up sometime in the 1990’s. Prior to that, though, I recall many businesses operating as “Ltd.” which I’d always assumed was some type of limited liability company. I don’t see (or notice) these any more. Was this just a change in terms in Michigan to bring us up to speed with the rest of the country, or was this (or is this still) something else altogether? [/QUOTE] Ltd. is just another way of indicating that the entity is a corporation. > [@](#): > > The corporate name of a domestic corporation shall contain the word “corporation”, “company”, “incorporated”, or “limited” or shall contain 1 of the following abbreviations, corp., co., inc., or ltd. [http://www.legislature.mi.gov/(S(siyzl5rbwi02ybqu0zwgtoqg)](http://www.legislature.mi.gov/(S(siyzl5rbwi02ybqu0zwgtoqg)))/mileg.aspx?page=getobject&objectname=mcl-450-1211&queryid=17697402 Michigan has also recognized limited partnerships at least since the 1930s, but the name of the partnership must include the words “limited partnership.” [http://www.legislature.mi.gov/(S(siyzl5rbwi02ybqu0zwgtoqg)](http://www.legislature.mi.gov/(S(siyzl5rbwi02ybqu0zwgtoqg)))/mileg.aspx?page=getObject&objectName=mcl-449-1102 [Next page](https://boards.straightdope.com/t/just-how-limited-is-the-liability-in-an-llc/401210.md?page=2)