How “Limited” is Your Liability as a Member of an LLC?

By Ron G. Tate, Esq.

Gallivan, White & Boyd, P.A.

The owners of many building companies choose to organize their business as Limited Liability Companies LLC).  Many home builders organize as an LLC to avoid potential personal liability in civil actions. They were taking advantage of what seemed on the surface to be a clearly worded statute that insulates individual LLC members from civil liability for wrongful acts, called torts, such as negligent construction.

Supreme Court Decision Changes the Protection of an LLC
The South Carolina Supreme Court’s April 4, 2012, opinion in 16 Jade Street, LLC v. R. Design Construction Co., LLC calls into question the “limited liability” nature of the LLC business entity. In that case, the court held that the Limited Liability Company Act (Act) does not shield an LLC member from liability for his own torts, but rather protects only those members who did not directly commit wrongful acts, from vicarious liability.

In this case, Carl Aten and his wife were the sole members of R. Design Construction Co., LLC (R. Design), a South Carolina LLC, acting as general contractor for a construction project in Beaufort, South Carolina. After defects were discovered and one subcontractor left the project over a payment dispute, the construction ground to a halt. R. Design abandoned the project, never replacing the subcontractor nor adequately addressing more than sixty defects. At trial, the court awarded the plaintiff $925,556 in damages, finding R. Design and the subcontractor liable, as well as finding Aten personally liable for negligence. On appeal, the South Carolina Supreme Court concluded that the Act does not shield a member of an LLC from liability for his own torts. Rather, the Act protects only non-tortfeasor members of an LLC from vicarious liability.  For example, Aten’s wife is shielded from liability because she was not found to be personally negligent.

About the LLC Act
The statute, § 33-44-303 of the South Carolina Code, provides that the liabilities of the LLC are solely the liabilities of the company, and a member or manager is not personally liable for them solely by reason of being a member or manager. In examining the plain language of the statute, the court acknowledged that it suggests a member is shielded from individual liability from torts committed in furtherance of the LLC. After all, as the court acknowledged, § 33-44-303(a) provides that obligations arising in tort are “solely” those of the company. A footnote further strengthens the argument against the court’s ultimate conclusion in pointing out that because § 33-44-303(c) expressly provides how a member can become personally liable, “it therefore stands to reason that the general rule is he is not otherwise personally liable.” (Emphasis added)

What the Court Said
Nevertheless, the court reasoned that the “right to sue one’s tortfeasor” is a “long-standing right” in our legal system, which will only be abrogated by statute through clear legislative intent. While the court agreed that “the language of the LLC act appears to insulate a member from personal liability,” it ultimately held that “such a sweeping liability shield was not intended by the General Assembly.”

The court also drew a parallel between LLCs and corporations noting that a shareholder of a corporation is not personally liable for the acts of the corporation except that he may become personally liable by reason of his own acts or conduct. Therefore, the impact of the decision is that business owners may not insulate themselves from personal liability for their own torts by organizing as either a corporation or an LLC.

The court certainly recognized the impact of its decision would be particularly acute in the case of a single member LLC. Because “one cannot be vicariously liable for his own actions,” there simply is no one to protect in the case of a single member LLC. Moreover, where the LLC member is a license holder who is required to be in charge of the work, this case raises a question of whether he or she may ever escape personal liability.

The court’s suggestion that the legislature could clarify the intent of the Act has already been taken: Senator Larry Martin has introduced a Joint Resolution of the General Assembly that the “clear and unambiguous intent of the… limited liability act was… to shield a member of an LLC from personal liability for actions taken in the ordinary course of business of the LLC.”

What You Need to do to Protect Yourself and Your Assets
So what does all this mean for you? Perhaps the proposed Joint Resolution will persuade the court that individuals in future cases should not be personally liable where they conduct business under an LLC. Until this issue is resolved by the legislature and the courts, many uncertainties remain. The best practical advice is to look closely at your company’s liability insurance coverages. Talk with your insurance agent or broker about your business risks and make sure that you have appropriate insurance policies that cover you and your activities at adequate coverage limits. Careful analysis of your insurance program is especially important for builders, because liability insurance coverage for construction defects is frequently the subject of litigation. Finally, talk with your legal advisor about how you may protect your individual assets in light of this decision.