A recent ruling confirms Limited Liability Companies value as a business form. In a recent decision by the Illinois first District Appellate Court, it was affirmed that the sole member of a Limited Liability Company (“the LLC”) could not be held personally liable for fraud while acting as managing member of the LLC.  In Dass vs. Yale, the plaintiff sued the LLC member, Yale, for false statements he made regarding the condition of a property being sold to the plaintiff.  Because Yale had made the statements in his capacity as managing member, however, the court held that Yale could not be personally liable for fraud.  In essence, the court held that the Illinois Limited Liability Act shielded Yale from any personal liability for actions taken in his management capacity for the LLC.

The LLC as Protection from Personal Liability

This case solidifies the role of the LLC as a business form in Illinois that is effective in protecting members from exposure to personal liability lawsuits.  The LLC is often attractive as it has far fewer formalities than are required for corporations.  At times, owners of corporations have been personally exposed to liability merely for failing to fulfill the corporate formalities.  The unsuccessful attempt by the plaintiffs in this case to ‘pierce the veil’ of the much simpler LLC is significant for those who are doing business using this form.

The facts of the case underscore the importance of the ruling.  There was no dispute over whether there were fraudulent statements made by Yale.  The motion to dismiss the fraud claim was based solely on the fact that Yale was acting within his LLC management role when he made them.  Of course, the plaintiffs could continue with the suit against the LLC itself, but the court barred them from pursuing a judgment against Yale or his personal assets.   The plaintiffs contended that Yale had concealed his role with the LLC, but the court was not swayed by this argument.

Using the LLC As An Alternative to the Corporation

The outcome of this case should provide some confidence to those who are considering the LLC as an alternative to a corporate business form.  The fact that a sole member LLC is afforded the same statutory protection as an Illinois corporation is significant.  Business owners can now utilize the LLC business form without fear of personal exposure to liability for fraud.

There are a few caveats to this conclusion, as several state statutes impose personal liability on business owners in some circumstances.  For example, the Illinois Wage Payment and Collection Act places personal liability on corporate officers or agents of an employer that knowingly permit violation of that Act.  This type of liability would extend to LLC members as well who have employee wage disputes.

Nonetheless, this important case should provide a new motivation for anyone considering the LLC as an alternative form of doing business in Illinois.  If you are interested in creating a Limited Liability Company, please contact us today.

This article is intended to serve as a general summary of the issues outlined therein.  While this article may include general guidance, it is not intended as, nor is it a substitute for, a qualified legal advice. Your receipt of this article from Lexern Law Group, Ltd. (the “LLG”) or any of its attorneys does not create an attorney-client relationship between you and the LLG.  The opinions expressed in this articles are those of the authors of the article and does not reflect the opinion of the LLG.