Personal Liability of Members and Managers: Torts, Statutes and Taxes

Scope of the chapter. The liability shield protects members and managers against the debts, obligations and liabilities of the LLC. It does not protect them against their own. This chapter examines the principal sources of personal liability that the shield leaves untouched: liability for a member's or manager's own torts, liability on contracts the member or manager makes or guarantees, the federal and state tax statutes that reach the persons responsible for collecting and paying over taxes, the employment, benefits, environmental and securities statutes that impose liability on individuals who control an enterprise, criminal liability, and the liability of members who receive distributions when the LLC dissolves without paying its creditors. It closes with the means by which members and managers manage these risks.

Two kinds of claim. Every claim against a member or manager falls into one of two categories. The first is a claim that seeks to hold the member or manager liable for an obligation of the LLC because of that person's status as a member or manager. The shield bars that claim, subject to the exceptions examined in chapters 25 and 26. The second is a claim that the member or manager is liable for an obligation of his or her own, arising from his or her own conduct, contract or statutory role. The shield has nothing to say about that claim, and a member or manager who is sued on it must defend on the merits. The distinction is the organizing principle of this chapter.

Organization. The chapter proceeds in nine parts:

1. the shield and the member's own conduct (¶ 2810);
2. torts and the participation doctrine (¶ 2820);
3. contractual undertakings, including guaranties and contracts made without disclosing the principal (¶ 2830);
4. the federal trust fund recovery penalty (¶ 2840);
5. employment taxes of disregarded LLCs and state responsible-person taxes (¶ 2850);
6. wages and employee benefits (¶ 2860);
7. environmental, securities and criminal liability (¶ 2870);
8. liability on dissolution (¶ 2880); and
9. managing the risk (¶ 2890).

Relation to other chapters. The statutory shield and its scope are examined supra ch. 25. Veil piercing and alter ego, which disregard the shield, are examined supra ch. 26. Limits on distributions and the liability of members who receive wrongful distributions while the LLC is operating are examined supra ch. 14. Exculpation, indemnification and insurance are examined supra ch. 23. Professional liability in professional LLCs is examined supra ch. 11, and the tax treatment of members, including self-employment tax, is examined infra chs. 42 and 45.