Information About Limiting Your Liability With a California LLC
Disregarding circumstances detailed in the section Exceptions to California Corporation and LLC Personal Liability Protection, your personal assets are protected from outside claims when you establish a California LLC. However, you may still be liable to other members or managers within your limited liability company.
Precedents have established that you cannot be held liable to other members or managers for a loss if you made the decision that led to the loss in good faith, fully disclosing possible risks to other members. For example, imagine that you plan a new project for your California LLC, propose it at a well-documented meeting, and a majority of other members or managers vote to undertake it. Assume the project fails, costing your limited liability company and those with interest in the business a great deal of money. Those who voted against the project cannot hold you liable for their losses, as long as you initially disclosed all information regarding the new project. If a court can prove that you were dishonest or gave incomplete information in garnering votes for the project, you may be required to compensate for losses with personal assets.
Members of a California LLC can also sue one another. Any party found responsible for fraud or negligence will have to pay for all legal fees, and may be required to compensate for losses using personal assets. Lawsuits within California LLCs are complicated, and will require the guidance of your California incorporation lawyer to finesse.
California LLC Liability from Outsiders
In some circumstances, outsiders can also jeopardize your personal assets, as well as your interests in a California LLC. For example, creditors can attack your share in an LLC if you fail to pay off loans. Banks or other creditors can acquire a charging order, which re-routes profits of an individual LLC member to the creditor. The creditor can even ask the state to take a member’s interest in a California LLC and give it to the creditor, making the creditor a new member. However, usually if a creditor becomes a new member of a California LLC, the creditor can profit financially from the limited liability company, but cannot make managerial decisions. In extreme cases, a creditor who did not receive payment on a loan can ask the state to dissolve an LLC. You will need the help of an experienced California incorporation lawyer should you ever encounter one of these complex situations.
Members of an LLC can lose their personal assets if outside damages occur due to negligence. For example, if the negligence of an LLC member causes an accident while driving for work-related purposes, the personal assets of the responsible individual are likely to be at risk, rather than the assets of the California LLC.
Due to these risks, it is recommended that California LLCs obtain liability insurance in addition to limited liability status. Talk to your California incorporation attorney about insurance options, as he or she may be able to make helpful recommendations and referrals.