Does Forming an LLC Protect Members from Personal Liability?

Business founders often form a Limited Liability Company (LLC), expecting the LLC structure to shield them from personal liability for the company’s debts and obligations. While Maryland law does provide meaningful liability protection for an LLC member, it does not categorically prevent the member from being held liable in an individual capacity.

Under Maryland law, an LLC member generally is not personally liable for the obligations of the company solely because they are a member. In most circumstances, creditors seeking to collect a business debt must look to the LLC’s assets, not the member’s personal assets. That protection, however, is limited to liability arising from ownership status alone and does not extend to liability based on an individual’s own conduct or independent legal obligations.

As a result, an LLC member may still face personal liability in several situations, such as:

• Signing a personal guarantee of company debt
• Liability imposed directly by statute
• The member’s own tortious conduct (for example, fraud).

The LLC’s liability shield is strongest when the company is operated as a separate legal entity serving a legitimate business purpose. Maryland courts generally pierce the LLC veil only to prevent fraud or enforce a paramount equity. In evaluating whether that standard is met, courts may consider factors such as the LLC member treating the LLC as an extension of personal finances or using the LLC to facilitate unlawful conduct. These practices can undermine the liability framework and weaken the argument that the LLC should shield the LLC member from personal exposure.

Understanding the scope and limits of LLC liability protection is a critical aspect of building and protecting a business. As business lawyers, we assist business owners at every stage of ownership, offering guidance in selecting the best entity, drafting customized governing documents, and providing ongoing business counsel.