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Can You Be Held Personally Liable for Your LLC’s Debts?
Entrepreneurs who create a limited liability company (LLC) are protected from putting their personal assets at risk for business debts. Right? After all, that’s the main purpose of the LLC. “Limited liability” is even in the name.
Well, not always. There are situations in which a member of an LLC is not protected and can be held personally responsible for business debts.
Today we’re going to look at a 2019 case from the South Carolina Court of Appeals, Johnson v Little (read it here), that touches on a number of issues that are important for business owners to know, including limited liability and breach of contract.
Johnson v Little: The Facts of the Case
Robin Johnson of CQI Pharmacy Services, LLC and Robert Little of CQI Oncology/Infusion Services, LLC, had a rather unusual situation. Both were the sole owners of their companies and at the same time were employees at the other’s company, with the power to write checks from the other’s business.
In spring 2013, Johnson paid invoices in the amount of $25,568.59 to settle vendor accounts for Little’s company, CQI Oncology. At some point, Little removed Johnson as an authorized signatory for his business and the checks Johnson had signed and sent to the vendors ended up not going through.
Shortly thereafter, the two entered into a contract for Johnson to purchase assets of Little’s company for the price of $30,000. The contract stated that “the Property is free and clear of any liens or encumbrances” but due to the bounced checks, that turned out not to be the case. Johnson discovered that the invoices were still outstanding and that as the new owner, she owed the outstanding amount to the vendors.
Johnson sued Little for breach of contract, among other things. The matter was tried by a master, who found in favor of Johnson. An appeal followed.
The Three Elements of Breach of Contract
The master found that the following three elements of breach of contract were satisfied in this situation:
- There was a valid contract. Neither party disputed this.
- There was a breach of the contract. The contract contained language stating the Property was free and clear of “encumbrances” when that was not true. The outstanding invoices were a clear encumbrance. Little tried to argue this point unsuccessfully.
- There were damages resulting from the breach. Johnson had to pay the vendors’ invoices herself, costing her over $25,000.
All three criteria must be satisfied in order to find a breach of contract occurred, as they were in this case.
The standard remedy for a breach of contract is for the breaching party to reimburse the nonbreaching party so that it’s as if the breach had never happened. The Court of Appeals reaffirmed this standard in this case, by rejecting the master’s decision to award Johnson an additional $30,000 above the amount of the invoices. This would have put her in a better position than she would have been had the breach never occurred, which violates the general rule for breach of contract remedy.
A Lesson on the Limits of Limited Liability
Now we come to the part about personal liability for company debts. In the appeal, Little argued that the master erred in finding him personally liable in addition to his company. The contract he entered into with Johnson was done so and signed by Little as the sole member and manager of the LLC, and as an individual.
This is so important, it bears repeating: Little entered into the contract and signed it as a representative of his LLC and on his own behalf.
The Court of Appeals states that because Little “was a party to the contract as an individual and his actions caused the contract to be breached, the master did not err in holding him individually liable.”
A simple lesson here is to always sign anything relating to your business as the LLC’s owner. When signing a contract or endorsing a check, include the full name of the LLC and sign as “John Q. Smith, Manager.” Sign a company check (which already has the LLC’s name on it) with your name and role.
Other Limits of Limited Liability
If Little had signed only as a member/owner and not as himself, could he still have been found personally liable? Possibly. In its decision, the Court of Appeals cites a 2012 South Carolina Supreme Court case, Dutch Fork Dev. Grp. II, LLC v. SEL Props: “as a matter of law, a manager of a limited liability company can wrongfully interfere with his company’s contracts and be held individually liable for his acts.” In the case at hand, the Court did determine that Little’s actions constituted “wrongful interference” with the company contracts, whether he signed the contract as an individual or not.
Another way a business owner may be held personally liable is if they commit a tort, or wrongful act, such as fraud. Liability can also be suspended due to piercing the corporate veil. Learn more about this important concept on our blog, here.
Get Help with Contracts Strategic Business Advice
This is just a brief overview of the ways in which an LLC owner may be held personally liable for business debts, and the true lesson is that business law is often not as straightforward as it appears. For that reason, it’s smart to have an experienced business attorney in your corner who can provide you with strategic business advice like Gem McDowell.
Gem is a problem solver and a business attorney with over 25 years of experience who can advise you whether you’re looking to buy a company, start a new company, or grown an existing company. Call Gem and his associates at their Mt. Pleasant office at 843-284-1021 to schedule a free consultation today and get the help you need.