When are owners personally liable for an LLC’s debts?

When are owners personally liable for an LLC’s debts?

On Behalf of | Apr 18, 2023 | Business And Commercial Law |

Going into business can be a gamble, as there are no guarantees of success. If your business venture fails, you might worry about losing your personal assets. That is, your venture’s creditors might try to hold you personally liable for its debts.

According to NerdWallet, shielding oneself from personal liability is one of the more valuable benefits of setting up a limited liability company. Indeed, with an LLC, you are not personally responsible for your company’s debts. Sometimes, though, courts pierce the liability veil and hold owners accountable.

A frustration with contractual responsibilities

Courts in Mississippi apply a three-pronged test when deciding whether to pierce an LLC’s veil. The first prong involves a frustration of contractual responsibilities between the parties. Therefore, to keep the LLC’s liability intact, it is important to comply with your venture’s contractual duties.

A flagrant disregard for formalities

While LLCs have fewer formalities than corporations, there are some formalities with which owners must comply. If you neglect to follow these formalities, a court might decide to hold you personally responsible for your LLC’s debts.

Fraud of malfeasance

Judges tend not to reward LLC owners who engage in fraud or commit other serious wrongdoings. As a result, to keep a court from piercing the veil, you should ensure your venture follows the law and conducts ethical business.

It should not be difficult to keep your LLC’s liability veil in good shape. Ultimately, by remembering the three-pronged test, you can avoid losing your personal assets to your LLC’s creditors.