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Clearing the Confusion About Individual Liability in South Carolina LLCs

One of the main benefits of forming a limited liability company (perhaps better known as an LLC) is that this type of business structure is understood to shield owners' personal assets in the event that the business becomes encumbered by significant financial obligations. For instance, if someone sues an LLC and obtains a judgment awarding financial damages, even if the business runs out of money, real estate, savings, retirement accounts and any other personal property owned by individual LLC members generally cannot be touched. But, at least in South Carolina, LLC members can face individual liability under certain limited circumstances.

South Carolina Supreme Court Rules Individual LLC Members Liable For Own Torts

South Carolina's LLC statute reads in part:

[T]he debts, obligations, and liabilities of a limited liability company, whether arising in contract, tort, or otherwise, are solely the debts, obligations, and liabilities of the company. A member or manager is not personally liable for a debt, obligation, or liability of the company solely by reason of being or acting as a member or manager.

For a long time, this statute was assumed to mean that a member of an LLC was not personally liable, and therefore did not put his or her personal assets at risk, when he or she committed a wrongful act in the course of working on the LLC's business.

However, this assumption changed in 2012 with the South Carolina Supreme Court decision in 16 Jade Street, LLC v. Design Construction Co., LLC. In the case, Carl Aten, a licensed residential builder, and his wife were the sole members of R. Design Construction Co., LLC. Acting for R. Design Construction, Aten took on a project serving as general contractor in the construction of a condominium complex for 16 Jade Street, LLC.

As construction commenced, the relationship between Aten and Jade Street deteriorated. Eventually, inspectors discovered more than 60 defects in the partially completed structure.

A construction dispute ensued in which Jade Street sued both R. Design and Aten. Aten argued that he could not be held personally liable for the acts he committed as an agent of R. Design due to its structure as an LLC. However, the South Carolina Supreme Court was not swayed. The Court ruled that while members of the LLC who had not themselves committed a wrongful act (in this case, Aten's wife) were shielded from personal liability, the LLC structure does not insulate a tortfeasor member from personal liability for his own acts. In other words, simply being an LLC member does not mean you can't be personally sued for something you did while carrying on the business of the LLC.

What Does Individual Liability in LLCs Mean For Your Business?

Under the right circumstances, there are still benefits to forming an LLC versus some other corporate entity. But, knowing that simply being part of an LLC will not protect you from incurring personal liability for your own actions means that you have to be especially careful, and that you should consult a South Carolina business and commercial law attorney when trying to determine what kind of structure would be best for your business or the extent and risk of individual liability.