The Liability Shield

Scope of the chapter. The liability shield is the feature of the LLC that most clients have in mind when they ask for one. It protects members and managers from personal liability for the debts, obligations and liabilities of the company. This chapter examines the statutory text that creates the shield, the scope of the protection it confers, the claims it does not reach, the role of formalities, the law that governs the shield when the LLC operates outside its formation state, the shield during dissolution and winding up, its application to series, professional LLCs and insolvent companies, and the practices that keep it intact. The circumstances in which a court will disregard the shield are examined infra ch. 26, creditor remedies against a member's interest infra ch. 27, and the personal liability of members and managers for their own conduct and under particular statutes infra ch. 28. The use of the shield in planning to protect assets is examined infra ch. 55.

The central point. The shield protects against vicarious liability only. A member or manager is not liable for an obligation of the LLC solely because of that status. The shield does not protect a member or manager against liability that arises from the member's or manager's own acts, from a contract the member or manager has signed in a personal capacity, or from a statute that imposes liability on persons who occupy a particular role. Most errors in advising on the shield come from treating it as a general immunity. It is a rule about whose debt an obligation is. It leaves untouched the separate question whether a member or manager has incurred a debt of his or her own.

Organization. The chapter proceeds in nine parts:

1. the statutory shield (¶ 2510);
2. its scope and the meaning of "solely by reason of" status (¶ 2520);
3. what the shield does not cover (¶ 2530);
4. formalities (¶ 2540);
5. choice of law (¶ 2550);
6. dissolution and winding up (¶ 2560);
7. series, professional LLCs and bankruptcy (¶ 2570);
8. capitalization and insurance (¶ 2580); and
9. maintaining the shield in practice (¶ 2590).