Why People Need an LLC

When LLC Member May Be Held Personally Liable For Signing Loan Agreement

Take care when you sign a contract on behalf of your LLC that you do not sign in a way that makes you liable as a party to the contract.  California LLC law contains the general rule that a California LLC that signs a contract is liable for the obligations created under the contract, not its members.  There is a big exception to the general rule.  If you will be signing contracts for a California LLC ignorance of how to sign the contract could cost you big bucks.

The Maryland case of Ubom v. Suntrust Bank, involved a a lawyer who obtained a line of credit for his LLC.  The member of the LLC signed a loan agreement that included language about a personal guaranty.  The member put his personal information such as his social security number and personal address in the guaranty section of the contract, but he did not put anything in the space that asked for the “Legal Name of the Guarantor.”

The loan agreement had a signature line for the “applicant” and a second signature line for the “guarantor.”  Mr. Ubom signed one each lien and wrote “Managing Attorney” after his signature.  The LLC defaulted on the loan and the lender sued the LLC and Mr. Ubom.

The lender claimed that Mr. Ubom was personally liable as a guarantor because language in the loan agreement stated that he guaranteed the loan.  The loan agreement said:

To induce Bank to open the Account and extend credit to the applicant, or to renew or extend such other credit, each of the individuals signing this Application as a “Guarantor” (whether one or more, the “Guarantor”) hereby jointly and severally guarantee payment to Bank of all obligations and liabilities of the applicant of any nature whatsoever and whether currently existing or hereafter arising, including without limitation, all obligations and liabilities under this Application and/or the Account, and reasonable fees and expenses of Bank’s attorney(s) incurred in the collection of such obligations (collectively the “Obligations”).

The court said that based on the language quoted above Ubom agreed to guaranty the debt.  The court said it did not matter that Ubom did not put his name in the on the “Legal Name of the Guarantor” line.

Before you sign a contract on behalf of your LLC you must carefully read the contract and make sure it does not contain any language that would obligate you as the signer.  If you are not sure that signing a contract for your LLC will not cause you to incur liability ask your attorney to review the contract.

By |2016-12-13T21:20:14-07:00July 29th, 2014|Categories: Asset Protection, Lawsuits, Operating LLCs, Why People Need an LLC|0 Comments

Why Form an LLC?

Question: I understand that if I form a limited liability company to operate my business and I am the only person who provides services on behalf of the business that I can be sued and be liable for my acts or omissions that cause harm to third parties. Instead of forming an LLC, can’t I just load up on insurance and not form an LLC to operate my business?

Answer: Yes, but it could be a costly mistake. When you operate a business, commercial insurance is always your first line of defense. Your business should never operate without appropriate insurance coverage. Consult with several experienced business insurance agents and get their advice as to the type of insurance and the coverage amounts that are appropriate for your particular business. Always buy as much insurance as you can afford of the type that is appropriate for your specific type of business.

You operate a business through a limited liability company because it is your second line of defense against things that can go wrong with the business. What if you have insurance and the insurance coverage is denied? What if a plaintiff gets a judgment that exceeds the amount of insurance coverage? If you don’t form an LLC to operate your business and a plaintiff gets a judgment that exceeds the amount of your insurance coverage against you as the owner/defendant, all of your personal assets are at risk and could be lost

Fundamental Fact of Business Life: Without an LLC to operate your business, you are 100% liable for every thing that goes wrong. Do you really want to be in that position and have all of your life savings at risk? It’s hard to predict how liability may arise, but if you operate the business through an LLC, the general rule is the owners are not liable for the debts or obligations of the LLC. Wouldn’t you rather start from the position that you are not liable for anything (except your own acts and omissions) instead of the position that you are liable for everything?

Bottom Line: I believe it is foolish to operate a business without adequate insurance coverage and without operating the business through a limited liability company or a corporation.

By |2016-12-13T21:20:16-07:00January 9th, 2014|Categories: Asset Protection, CA LLC Formation, FAQs, Why People Need an LLC|0 Comments
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