top of page
  • Venus Caruso

Florida: How LLC Members Become Personally Liable for LLC Debts

Florida limited liability companies (LLCs) are popular business entities due to their flexibility in governance and liability protections afforded to its members. In general, LLCs are intentionally designed to shield the personal assets of its members and limit the liability, debt, and obligations of the LLC to exclusively be those of the LLC. Specifically, section 605.0304, Florida Statutes, provides:

“[a] debt, obligation, or other liability of a limited liability company is solely the debt, obligation, or other liability of the company. A member…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.”

This same limitation of liability applies to dissolved Florida LLCs. However, this protection is not absolute.


This post highlights three different ways on how members of a Florida LLC can become personally liable for the debts of their LLC: signing LLC contracts in a personal capacity, signing a personal guarantee for the debts of the LLC, and alter ego claims.


Signing in a Personal Capacity

When a member has authority to sign and bind an LLC to a contract and that member signs in a personal capacity, this can result in that member being held personally liable for that contract. Members authorized to sign contracts on behalf of the LLC should always sign in their representative capacity to avoid this personal liability. In this regard, it’s important to ensure the signature block on the contract includes a line item for the member to specify the member’s representative capacity (e.g., managing member, AMBR, CEO, VP, Director, etc.). This type of line item serves to clearly indicate that the signing member is executing the contract for and on behalf of the LLC and not in an individual capacity. Signature blocks for business contracts may slightly vary but typically appear as follows:


XYZ LLC


Print Full Name:


Signature:


Title:


If a contract’s signature block fails to include a line item for the member's job title or representative role, correct this omission by adding the title underneath the member’s name or signature to clearly indicate the contract is being signed as a representative of the LLC.


Signing Personal Guarantees

When a member signs a personal guarantee for a debt of the LLC (such as, for example, a loan, line of credit, or revolving line of credit) and the LLC defaults on the debt, the guarantying member becomes personally liable to repay the debt according to the terms of the guarantee, regardless of the LLC’s status or the reasons that the LLC is unable pay. Personal guarantees vary in type, scope, rights, obligations, and limitations. They can be general, absolute, special, limited, conditional, and continuing, any of which can be joint and several and secured or unsecured.


Depending on the type of guarantee and the terms and conditions specified in the guaranty agreement (or clause), a guarantying member’s personal risk of liability will vary. To generally illustrate the varying level of risks for personal liability, the following provides a brief overview on the different types of personal guarantees.

  • General Guarantee: this covers a specific debt tied to a specific maturity date, such as a loan that matures at a specified date. If the LLC defaults, the guarantying member is personally liable to repay the outstanding amount of the debt up to and through the maturity date.

  • Absolute Guarantee: this is an unqualified guarantee, providing a creditor with a right to immediately pursue repayment of the debt from the guarantying member without having to first attempt repayment or collection from the LLC.

  • Special Guarantee: this covers a specified debt that a guarantying member will be personally liable to repay in the event of default by the LLC.

  • Limited Guarantee: this limits the guarantying member’s personal liability to a pre-determined fixed sum or a fixed percentage of the LLC’s outstanding debt.

  • Conditional Guarantee: this provides certain conditions that a creditor must first satisfy before it can pursue repayment or collection of the debt from the guarantying member. A couple of examples of such conditions is obligating the creditor to first attempt repayment from the LLC and exhausting all collection efforts against the LLC before it can pursue repayment or collection from the guarantying member.

  • Continuing Guarantee: this covers all past, present, and future debts of the LLC and contemplates a future course of dealings involving a series of transactions (such as a loan, line of credit, or revolving line of credit, and any extensions of time and renewals). If the LLC defaults, the guarantying member becomes personally liable to repay the entire amount.

Additionally, a personal guarantee, regardless of type, may include a waiver that may either limit or entirely relinquish a guarantying member’s legal rights. The terms of a waiver can vary. For example, the waiver may require a guarantying member to waive any rights of revocation, notices of default, notices for demand of repayment, defenses, counterclaims, offsets, or subrogation rights (i.e., giving up the right to step into the shoes of the creditor to collect from the LLC after the guarantying member has paid what is owed), among others.


Accordingly, when reviewing a personal guarantee, it’s important for the guarantying member to understand the nature, scope, rights, obligations, and overall terms and conditions, to properly assess the guarantying member's risks of personal liability in the event the LLC defaults.


Alter Ego Claims

Florida law heavily favors recognizing an LLC as a separate legal entity that is distinct from its members. This separation effectively shields the LLC members from incurring personal liability for the debts and liabilities of the LLC. However, this separation can also be disregarded in cases where the LLC, in reality, is used as a conduit by its controlling members to commit fraud or engage in an improper purpose. In such cases, the LLC is viewed as the alter ego of its controlling members and results in the LLC and its controlling members being regarded as the same party for purposes of liability.


To prevail on an alter ego claim, a plaintiff must prove all of the following: (1) the members dominated and controlled the LLC to such an extent that the LLC’s independent existence is in fact non-existent, (2) such members used the LLC for a fraudulent or improper purpose, and (3) that fraudulent or improper use caused harm. See generally BEO Mgmt. v. Horta, 314 So.3d 434, 437 (Fla. 3d DCA 2020) (citing Gasparini v. Pordomingo, 972 So.2d 1053, 1055 (Fla. 3d DCA 2008)).


In evaluating an alter ego claim, Florida courts examine the totality of the circumstances to determine who actually owns and controls the LLC and who is using the LLC as a mere conduit for fraudulent or improper purposes. Some examples of the circumstances that Florida courts evaluate include, but are not limited to:

  • the purpose and function of the LLC (i.e., is it a legitimate business entity or a sham)

  • whether the controlling members commingled LLC assets with personal assets or siphoned LLC assets for personal use (e.g., using LLC funds to purchase personal or household items, to pay personal debts like credit cards or loans, to pay for personal vacations, etc.)

  • the capitalization history and status of the LLC (i.e., was the LLC formed or kept without sufficient funds to meet its current or future debts)

  • whether the LLC filed tax returns

  • whether the LLC had its own bank accounts

  • whether the LLC conducted any business

  • whether the controlling members transferred LLC assets to evade debts or mislead or defraud creditors, and

  • whether the controlling members depleted LLC assets for personal benefit

It’s important to note that in the absence of showing fraud or an improper purpose, an alter ego claim will fail, and the LLC veil will not be pierced. See Dania Jai-Alai Palace Inc. v. Sykes, 450 So.2d 1114, 1121 (Fla. 1984) ("Those who utilize the laws of [Florida] in order to do business in the [LLC] form have every right to rely on the rules of law which protect them against personal liability unless it be shown that the [LLC] is formed or used for some illegal, fraudulent or other unjust purpose which justifies piercing of the [LLC] veil.") (alterations added) (emphasis added); 111 Properties, Inc. v. Lassiter, 605 So.2d 123, 126 (Fla. 4th DCA 1992) (“Absent fraud, the corporate veil is not pierced.”) (quoting American States Ins. Co. v. Kelley, 446 So.2d 1085, 1086 (Fla. 4th DCA) (citation omitted), rev. denied, 456 So.2d 1181 (Fla. 1984)).


Consequently, even where, for example, personal and LLC assets are commingled or LLC funds are used to pay for personal items or debts, these circumstances must be tied to a fraudulent or improper purpose for an alter ego claim to succeed. See e.g., Flooring Depot FTL, Inc. v. Wurtzebach, 330 So.3d 47, 49 (Fla. 3d DCA 2021) (“Numerous courts, including ours, have reversed court rulings allowing parties to pierce the corporate veil when there were insufficient allegations or findings of improper conduct. See Geigo Props., L.L.P. v. R.J. Gators Real Estate Grp., Inc., 849 So.2d 1109, 1111 (Fla. 4th DCA 2003) ("[T]he mere use of a shell corporation to enter into the lease, and the subsequent breach of the lease by failing to pay rent, did not constitute the type of improper conduct necessary to pierce the corporate veil."); 111 Props., Inc. v. Lassiter, 605 So.2d 123, 125 (Fla. 4th DCA 1992) (forming a corporation to keep the seller from knowing who was purchasing the property was not improper conduct that warranted piercing the corporate veil); U-Can-II, Inc. v. Setzer, 870 So.2d 99, 99 (Fla. 1st DCA 2003) (reversing a trial court's decision to pierce the corporate veil when there were no specific findings of improper conduct and appellee failed to present evidence showing improper conduct or that appellant's corporation was organized to mislead creditors); Ally v. Naim, 581 So.2d 961, 962–63 (Fla. 3d DCA 1991) (stating that the poor handling of business affairs alone does not justify piercing the corporate veil).”) (quotations in original) (alterations in original).


Final Remarks

Florida LLCs are popular business entities due to their flexibility in governance and personal liability protections. While an LLC shields its members from personal liability for the debts and liabilities of the LLC, this shield of protection is not absolute. As addressed above, a member can become personally liable when the member signs a contract for the LLC in that member’s individual capacity, signs a personal guarantee for the debts of the LLC, and where controlling members of an LLC form or use the LLC as a conduit to engage in fraud or an improper purpose.


On a final note, these three different ways on how members of a Florida limited liability company can become personally liable for LLC debts are selected topics and not all-inclusive. There are additional ways, albeit limited, that members can potentially become directly liable for the debts, liabilities, and obligations of their LLC.

 

The information provided in this post is for general informational purposes and not intended as legal advice or legal opinion for any individual matter. Keep in mind that legal developments or changes to law may occur in the future and, as such, the information contained in this post may not be the most up-to-date legal or other information. Do consult your own attorney for any legal advice you may require. If you do not have an attorney and would like to explore a potential engagement for my services, please reach out to me using the contact submission form or by using the contact information provided in my bio.

Comments


Commenting has been turned off.
bottom of page