How can I become personally liable for my Florida LLC’s debts?

Florida limited liability companies (LLCs) are beneficial because they protect your personal assets and provide flexibility in how you structure your business. An LLC member generally can’t be made to pay the LLC’s debts; those liabilities belong to the company alone. Section 605.0304 of the Florida Statutes notes that, with few exceptions, a member or manager is not liable for debts of the company.

Even when a Florida LLC has been dissolved, its members and managers retain protection from being forced to pay the LLC’s debts. The phrase “piercing the corporate veil” is often used, and, in Florida, these protections have some exceptions.

But that doesn’t mean that members can do anything they want and stay safe from creditors and lawsuits. Members and managers of an LLC can be held liable in three primary ways: personal contracts, promises to pay the company’s debts and allegations of alter ego.

Signing on Behalf of the LLC

You should always distinguish between commitments you make as a member or manager and those you make individually. Generally speaking, contracts must be signed by members and managers in their capacity as representatives of the LLC. To do this, the member or manager should identify themselves as such, and the signature block should include the name and position in the LLC. But if you sign a contract as an individual, or fail to identify yourself as a member, then you could be personally liable for paying the company’s debt. To avoid being exposed to personal liability, always write ”Member, XYZ LLC” or ”Managing Member, XYZ LLC” beneath your signature. Titles may include AMBR, CEO, VP, Director or any other title signifying your position in the LLC.

Printed Name of authorized signatory

By: Signature of the authorized signatory

Title: Member of XYZ, LLC

Add a line showing title, if it’s not already in the text. This will make it clear that you are signing on behalf of the LLC, not as an individual.

Personal Guarantee

A personal guarantee of the LLC’s debts or obligations is another way a member or manager may be held personally liable for the LLC’s debts. When you sign one of these promises, you make yourself personally liable to pay the LLC’s debt in the case of default. If you sign a personal guarantee, you could have to pay back the creditor even if the LLC has already been dissolved. Guarantees are common for most loans and lines of credit, including revolving credit lines. There are many types of guarantees, and you should make sure that you and your advisors understand the scope of the guarantees that are required. Some can be joint and several, and secured or unsecured.

Each type exposes you to different levels of personal risk depending on the terms of the guaranty agreement.

An absolute guarantee pledges an unqualified promise of repayment. A creditor is free to come to the guarantor for repayment without first pursuing the primary debtor, the LLC.

A special guarantee is limited in that it applies to only one obligation. It’s a promise to repay a specified LLC debt if the company defaults on it.

A limited guarantee caps how much the guarantor will have to pay to the lender in case of default. It could be a flat dollar amount or a percentage of the remaining debt.

A conditional guarantee requires the creditor to first satisfy certain specified conditions before they can collect from the guarantor. In the case of a loan, the lender may have to first seek payment from the LLC and exhaust their collection efforts against it. A condition is a requirement for collection, and the guarantee should clearly state what must occur before you’ll be liable.

Continuing guarantees cover a series of transactions with a creditor over time, such as a revolving line of credit, in which the LLC can continuously borrow and repay money from the same creditor. This type of agreement holds the member personally liable for any of the LLC’s existing, future and past debt. That liability covers renewals, extensions and other credit lines. On default, the guarantor owes the entire amount.

From a creditor’s perspective, a lender wants the guarantor to be on the hook if the LLC can’t repay a loan or perform another obligation. That’s why so many guarantees contain waivers that reduce guarantor rights. Lenders sometimes ask guarantors to give up rights that make their task of collecting more difficult. A guarantor might be asked to waive the right to notice of the LLC’s default, for example, or to give up the chance to exercise some defense or counterclaim in a lawsuit. Waivers can take away rights that can help a guarantor reduce or even eliminate their liability to the creditor. The guarantor also may be able to force the creditor to give notice before coming after the money, and they might have the right of offset to reduce what they owe. A waiver may also remove a guarantor’s right to revoke the agreement entirely. Another right lenders sometimes ask a guarantor to sign away is the right to ”subrogation,” which is the guarantor’s right, once they’ve paid the debt, to step into the creditor’s shoes and collect what they paid from the primary debtor, the LLC.

Before you sign any form of guarantee, understand its nature and scope, the rights you’re giving up, and those you’re retaining and which obligations you have to the creditor. Know what you’re getting into and check with an attorney to know the true personal risk and impact of default.

Alter Ego Liability

Finally, another danger to personal liability for LLC owners is a legal claim known as ”alter ego liability.” This type of lawsuit alleges that the LLC is your “alter ego” and that you’re personally on the hook for the LLC’s debts. The traditional view of the corporate veil is that the business entity and the member behind it are separate and distinct. An alter ego argument essentially asserts the opposite: that the member and the LLC are one and the same. In Florida, courts generally respect the rights of members and do not impose personal liability on LLC members for corporate obligations. Courts look for whether you’ve used the LLC as your alter ego to commit fraud or perpetrate injustice.

To prevail on a veil-piercing claim, the plaintiff must establish: (1) that the LLC entity was dominated and controlled to such an extent that it had no independent existence of its own; (2) that such control was used to commit a fraud or for an improper purpose; and (3) that the misuse caused injury to the plaintiff. The test comes from BEO Management v. Horta (Fla. 3d DCA 2020), which relies on Gasparini v. Pordomingo (Fla. 3d DCA 2008).

Courts don’t set bright line rules when they decide how best to deal with disputes over personal liability. Courts look at all the facts and circumstances involved to determine if there’s no “distinction between the entity and the owner.” The answer is often found in the factors the courts look at to determine if the LLC is a front for hiding your personal affairs. Those factors include, among others:

• Whether the LLC was formed for a legitimate business purpose or as a sham.
• Whether the owner treated company money and assets as their own, and vice versa. For example, you could be guilty of intermingling assets if you use LLC money for household items, credit card or loan payments, vacations and other personal expenses.
• The capitalization history - did the LLC have enough to pay current and future debts?
• Whether the LLC filed its own tax returns.
• Whether the LLC kept its own accounts, or if you mixed them with personal ones.
• Whether the LLC was truly a going concern that transacted its own business.
• Whether the owner moved assets out of the company to escape its debt or to deceive creditors.
• Whether you drained the company’s money or assets to put them in your pocket.

Even if a creditor proves the first element - that you are using the LLC as your alter ego - courts say that alone is not sufficient to impose personal liability. To pierce the corporate veil, a court must also find that the LLC was used to defraud or to perpetrate injustice. There is no pierced veil without an improper purpose. The idea is that members and managers should be able to rely on their limited liability protection unless they are using the company for illegal, fraudulent or unjust purposes, the Florida Supreme Court said in 1984 in Dania Jai-Alai Palace v. Sykes. Without fraud, the veil stays intact, the Fourth District Court of Appeal said in a 1992 decision about a company known as 111 Properties (Lassiter), quoting its earlier ruling in Kelley v. American States Insurance.

One would reasonably think that if you treat LLC money as your own, then you shouldn’t be protected by the corporate veil. But the act of intermingling corporate and personal assets, by itself, doesn’t support piercing the corporate veil unless tied to fraud or an improper purpose. In Flooring Depot FTL, LLC v. Wurtzebach, a 2021 decision, the Third District Court of Appeal noted that veil-piercing rulings get reversed when no improper conduct is alleged or found. The First DCA did exactly that in U-Can-II v. Setzer (2003). For a case that shows it takes more than that to pierce the corporate veil, take a look at the Fourth District Court of Appeal’s 2003 decision in Geigo Properties v. R.J. Gators: signing a lease through a shell entity and then breaching it wasn’t enough. In its Lassiter ruling, the Fourth DCA said forming a company to hide the real buyer, if that’s all that happens, is not improper. In Ally v. Naim (Fla. 3d DCA 1991), the Third DCA said that managing the company in a bad way also is not enough to pierce the veil without improper conduct. That doesn’t mean that you should rest easy that courts will respect your right to limited liability if you mingle your personal and LLC assets and checkbooks. The best practice is to always keep them separate.

An LLC is an excellent vehicle for creating a business that protects you and your assets. Don’t let this shield from personal liability lull you into a false sense of security. As with anything else, you should keep a close eye on the things you sign and the manner in which you run your business.

A member can also be found personally liable for corporate obligations in ways other than the three main ways listed above, though these can be uncommon. A creditor can argue that another legal reason allows a direct collection.