In this video, you get answers to these questions:
Am I personally liable if my LLC breached a lease agreement? That’s the question I’m answering today. I’m Aaron Hall, an attorney from Minnesota. Imagine this, you have an LLC and that LLC signed a contract or an agreement, perhaps it was a lease to rent some office space for your business. Now, let’s for purposes of this example, we’ll assume you did not sign a personal guarantee. Of course, you’re personally liable if you sign a personal guarantee. But in this case, you signed the lease agreement as a president of the LLC or as an agent of the LLC. In other words, the LLC was the party agreeing to the terms of the lease. If you breach that lease, so for example, if the company, your LLC stops paying money for rent, can they go after you personally? Generally the answer’s no.
That’s the whole idea behind an LLC, that you have limited liability. LLC stands for Limited Liability Company. Essentially, there is a liability shield between you personally as the shareholder or owner of the LLC and between the LLC, which may actually have liability under a breach of contract. In this scenario, the LLC breached the lease, but you did not personally.
Now, there are some creative arguments attorneys can come up with to try to claim that you have personal liability. One theory is tortious interference with contract. In other words, you as an individual encourage your LLC to tortuously interfere with a contract. However, if you were acting within the scope of employment as the president of the LLC, and you as the president made a decision that the LLC doesn’t have the money to pay the lease, you would typically not have personal liability there. Now, what would happen? What happens in a case where an LLC breaches a lease but it has no money? Well in that case, the landlord can sue the LLC. The landlord has a right in that lawsuit to subpoena you, to send you interrogatories or requests for production of documents in order to find out what actually happened as part of that discovery process. You still may have to respond to that as an agent or owner of the company, which is an annoyance, but you wouldn’t personally be liable for the money.
Now, there’s one other potential gotcha here and that is if the company was insolvent, so it didn’t have the means to pay its bills, but it was paying a profit distribution to you, then there may be a violation of the dissolution laws and insolvency laws, which would mean you might have to give some of that money back. And it really depends on the circumstances. Real frankly, practically speaking, a lot of times a creditor, like the landlord, doesn’t actually go after you for that because it’s a small amount of money.
There’s one other exception of this and that’s the Fraudulent Conveyance Act. There is a statute which basically says, look, you can’t take money out of a company and move it to someone else just to avoid liability to creditors. If there’s enough money at issue and there is enough incentive to chase that money, the landlord might have some creative theories to go after that money if it was transferred to you as the owner of the LLC. But the general rule is that there is a limited liability shield between the LLC and the owner of the LLC. For that reason, the owner is not liable for the debts of the LLC unless one of these exceptions apply.
As I referenced at the beginning, if you as an owner signed a personal guarantee, that’s a big exception. Then of course you are personally liable because you personally guaranteed under contract that if the LLC can’t pay, you would pay.
For more information on this, you’re welcome to visit aaronhall.com. Again, I’m Aaron Hall, an attorney in Minneapolis, Minnesota.
To learn more, visit my website at aaronhall.com