Florida Professional Service LLC Personal Liability Protections: Perks and Pitfalls
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Managers and members who provide professional services in Florida often choose to organize their businesses into Limited Liability Companies (“LLCs”) because LLCs generally provide freedom from personal liability for the obligations of the LLC. This blog post discusses exceptions to the general prohibition on holding LLC members or managers personally liable for the LLC’s obligations in Florida. Personal liability can leave managers and members on the hook for considerable monetary sums individually.
How do LLCs shield managers and members from personal liability?
Florida statutory law provides that generally LLCs shield a member or manager from personal liability for the obligations of an LLC. Pursuant to Section 605.0304, Florida Statutes, “[a] debt, obligation, or other liability of a limited liability company is solely the debt, obligation, or other liability of the company. A member or manager is not personally liable, directly or indirectly, by way of contribution or otherwise, for a debt, obligation, or other liability of the company solely by reason of being or acting as a member or manager.”
These protections exist even if an LLC dissolves or fails to observe normal formalities concerning decision making. Fla. Stat. §605.0304. Managers or members of LLCs are not generally personally liable for monetary damages. Limited liability is one of the paramount reasons for forming an LLC and the layers of protection from personal liability afforded by LLCs can be determinative in suits against individual managers or members. See Houri v. Boaziz, 196 So. 3d 383, 389 (Fla. 3d DCA 2016).
Managers or members may be personally liable under Florida statutory law
While Florida statutory law generally provides managers and members with personal liability protections for the obligations of the LLC, Florida statutory law also provides clear exceptions under which personal liability is prescribed. Pursuant to Fla. Stat. §605.04093, personal liability is imposed if a manager or member breaches or fails to perform their management duties and the breach or failure to perform, constitutes any of the following:
- A violation of criminal law, unless reasonable cause for the belief such conduct was lawful exists;
- A transaction from which the manager or member derived an improper personal benefit;
- An improper distribution;
- In a proceeding to the benefit of the LLC or a member, conscious disregard of the LLCs best interest or willful misconduct;
- In any other proceeding, recklessness or an act or omission that was committed in bad faith or with malicious purpose or in a manner exhibiting wanton and willful disregard of human rights, safety, or property.
While these exceptions are directly within the statute that prescribe personal liability protections to LLC managers and members, there are additional statutory grounds that cab impose personal liability on LLC managers and members.
Pursuant to the Fraudulent Transfer Act, Fla. Stat. §726.105, LLC managers and members can be held personally liable for fraudulent transfers that are made with an actual intent to hinder, delay, or defraud any creditor of the debtor; or without receiving a reasonably equivalent value in exchange for the transfer or obligation. While there are additional criteria relevant to the determination of whether a fraudulent transfer has occurred, the statute specifically indicates whether the transfer was made to the benefit of an insider can serve as evidence of the requisite intent.
This post does not identify an exhaustive list of statutory exceptions to LLC personal liability protections, but this post does identify common and general exceptions. Some additional, often fact specific exceptions exist, including statutes which provide personal liability exists if the manager or member has made a written obligation to make future contributions to the LLC or owes tax payments. Fla. Stat. §605.0403; 26 U.S.C. §3505; 26 U.S.C. §6672; Fla. Stat. §212.12.
Managers and members may be subject to personal liability under Florida common law
While determining whether an exception to LLC personal liability protections is statutory or otherwise is often complex and unclear, there are some instances where common-law principles clearly favor the imposition of personal liability on managers and members. The most blatant and clear example of common law principals imposing personal liability on managers and members is in instances where tortious conduct is committed individually by a member or manager. See Thorpe v. Gelbwaks, 953 So.2d 606 (Fla. 5th DCA 2007).
While less direct, members and managers can be held personally liable in cases where the party who suffers damages is able to effectively pierce the corporate veil. Essentially if the corporate veil is pierced, the individual members or managers are personally liable for the obligations of the LLC. To pierce the corporate veil in Florida, the injured party must typically show that the LLC is the alter ego of the manager(s) or member(s), that the manager(s) or member(s) engaged in improper conduct, and that the improper conduct was the proximate cause of the damages to the injured party. See Solomon v. Betras Plastics, Inc., 550 So. 2d 1182, 1184-85 (Fla. 5th DCA 1989).
These exceptions to LLC personal liability protections are again, not exhaustive. There are additional terms that may provide for the individual liability of a manager or member of an LLC such as the specific terms of the LLC operating agreement. “The precise terms of the [operating] agreement are critical in determining whether a party has breached a contractual duty.” See Demir v. Schollmeier, 199 So.3d 442, 445 (Fla. 3d DCA 2016). The specific operating agreement under which the LLC operates may provide for additional individual fiduciary duties or exceptions to an LLCs general personal liability protection.
LLCs do not eliminate the risk of personal liability for managers and members
Florida courts rarely find the conditions necessary to hold LLC managers or members personally liable exist. Accordingly, plaintiffs who seek to hold managers and members individually liable must be well versed in the exceptions provided by Florida law.
While the formation of an LLC generally affords a member or manager personal liability protections, such protections are not guaranteed. It is similarly important that managers and members are aware of their individual risks and that they make informed decisions regarding such risks.
Related blogs: Piercing the Corporate Veil in Florida: Essential Elements and Common Factors