Liability rules

The Liability Floor: Following the Obligation

The liability rules entry asks when a business obligation stays with the business and when it reaches partners, directors, officers, members, managers, or owners personally. The two entries here are NOT STARRED. “Unstarred” means legal resources may be supplied when the topic is tested; if it is tested without resources, you need only demonstrate recognition that the topic is at issue. You are not required to hold this topic cold because resources may be supplied.

You do need a usable floor: identify the entity, distinguish an entity obligation from an individual obligation, recognize personal wrongdoing and guarantees, and know the names and sequence of the shield and veil-piercing doctrines. Keep ready the vocabulary of partnership liability, official-capacity protection, LLC liability, unity of interest, domination, commingling, undercapitalization, misuse, fraud, and inequitable result. You do not need to carry exact element wording, exception lists, or numbered subsections. Read those from the supplied authority.

The governing materials are RUPA (1997), MBCA (2016), and ULLCA (2013), with Delaware law used when a prompt or supplied authority identifies it. A fiduciary-duty claim asks whether an insider violated duties; liability rules ask whether an obligation reaches that insider personally.

Recognition triggers are concrete: an unpaid debt where the complaint names a partner, director, officer, member, or manager; a signature followed by a title; a separate guarantee; a tort personally committed by an organizational actor; an LLC owner using company funds for personal bills; thin capitalization; or an owner using the entity to defeat a creditor. A judgment against the entity, followed by an attempt to levy against an individual, is also a signal.

Start by asking who incurred the obligation. A partnership is an entity and can owe its own debt, but RUPA generally makes partners personally liable for partnership obligations. A corporation’s debt ordinarily belongs to the corporation, not its shareholders, directors, or officers. An LLC’s debt ordinarily belongs to the LLC, not its members or managers. Only after identifying that baseline should you test a guarantee, personal misconduct, a statutory exception, or veil piercing.

Two Paths to a Human Defendant: Partner and Director Exposure

Partners. Under RUPA, the partnership and the partners are distinct. The partnership is liable for its obligations, and partners are generally jointly and severally liable for those obligations. That does not mean a partnership judgment automatically becomes a judgment against every partner. The creditor must establish the partner’s liability and satisfy the applicable enforcement requirements before reaching partner assets.

An incoming partner is not personally liable for partnership obligations incurred before the person's admission as a partner. A dissociated partner remains liable for partnership obligations incurred while a partner. A dissociated partner is not personally liable for partnership obligations incurred after dissociation.

A partner who pays more than the partner’s proper share may seek contribution from the other partners. The partnership must reimburse or indemnify a partner for payments and liabilities properly incurred in the ordinary and proper conduct of partnership business or in preserving partnership property. Thus, ask two separate questions: does the creditor have a claim against the partner, and does the partner have a reimbursement or contribution claim internally?

Directors and officers. A corporation’s obligation does not become a director’s or officer’s obligation solely because that person held office or participated in corporate management. A complaint naming a director is not enough. The question is whether the individual has an independent basis for liability.

Use this checklist:

• Did the person personally commit the tort? A corporate actor remains responsible for personal tortious conduct, even when acting for the corporation.
• Did the person personally guarantee the debt or sign an individual contract? If so, liability follows the guarantee or contract.
• Was the corporation clearly identified and was the signature in official capacity only? That generally supports corporate rather than personal contract liability.
• Does a statute impose liability on the individual?
• Is the claimed obligation actually one the corporation incurred, rather than one the individual undertook?

Official-capacity protection is not immunity for personal misconduct. Conversely, personal participation in corporate decisions does not itself convert a corporate debt into the director’s or officer’s debt. Corporate indemnification may affect reimbursement between corporation and individual, but it does not erase a third party’s independent claim.

The LLC Shield in Practice: Company First, Person Only on a Recognized Basis

ULLCA gives an LLC its own liability shield. A debt or other obligation of the LLC is solely the company’s debt, and a member or manager is not personally liable merely because of that status or because the person acted in that capacity. Failure to observe ordinary company formalities is not, by itself, enough to impose liability on a member or manager.

Run the LLC question in this order:

1. Identify the alleged debtor. A lease signed by the LLC is initially a company obligation; a separate loan signed personally by the member is initially an individual obligation.
2. Ask whether the member or manager separately guaranteed the obligation or personally contracted for it.
3. Ask whether a statute imposes personal liability.
4. Ask whether the person directly committed the wrongful act. The LLC shield protects against status-based liability, not liability for the person’s own tort or other personal misconduct.
5. Only then test veil piercing.

A company-versus-owner claim must not be collapsed into an entity-debt claim. If an LLC owes a supplier, the supplier’s ordinary claim is against the LLC. If the owner separately promised payment, that is a claim against the owner on the promise. If the owner personally damaged property, that is a direct claim based on the owner’s conduct. If the owner merely holds membership or management status, that fact alone does not create personal liability.

A supplied statute may identify particular exceptions, including tax, wage, environmental, or other statutory obligations. Read the provision’s exact language and do not assume that every statutory exception applies to every member or manager.

The decision tree below shows the central sequence. Direct misconduct should be checked as a separate personal basis before the veil question.

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Piercing the Entity Wall: Abuse Must Connect to Inequity

Veil piercing is exceptional. It does not ask whether the owner is important to the business. It asks whether respecting the entity would improperly allow the owner to use the entity as an instrument of abuse.

The usual checklist has two connected parts:

• Unity of interest. The owner and entity are not functioning as genuinely separate persons. Evidence may include domination, commingling personal and company funds, treating company property as personal property, ignoring records, using the same accounts indiscriminately, or representing the business as the owner’s personal operation.
• Inequitable result. Respecting the entity would promote fraud, evade an existing obligation, defeat a creditor, or produce another inequitable result connected to the misuse.

Undercapitalization is relevant when the entity was left without a reasonable ability to meet the kind of obligations it undertook. It is stronger when paired with domination, commingling, siphoning, or an effort to evade a known creditor. Undercapitalization alone does not automatically pierce the veil. Commingling alone does not automatically pierce it either.

The claimant should connect the factors to the obligation at issue. Suppose an owner forms an LLC, transfers no meaningful operating capital, pays personal expenses from the LLC account, and then uses the LLC to avoid a creditor’s invoice. Those facts support unity or domination, misuse, and an inequitable result. Suppose instead that a small LLC kept separate accounts, had limited capital because the business was genuinely new, and merely failed to maintain one internal record. The company-formalities failure, without more, is much weaker; under ULLCA it is not by itself a ground for personal liability.

The result of piercing is not that every owner is generally liable for every company matter. It permits the claimant to enforce the particular entity obligation against the owner when the required abuse and inequity are shown. The same broad reasoning can apply to a corporation. For an ordinary partnership debt, however, begin with RUPA’s direct partner-liability rule rather than trying to pierce an entity shield that generally does not protect general partners from partnership obligations.

Always separate veil piercing from direct liability. If a member personally commits fraud or physically damages another’s property, the claimant may proceed against the member for that conduct without proving that the LLC’s veil should be pierced. If the claim is only for an LLC debt, the creditor must rely on a guarantee, a statutory basis, or veil piercing.

One Liability Map: From Entity Debt to Personal Judgment

For this item, the supplied ULLCA provision states:

An obligation of an LLC is solely the obligation of the LLC, and a member or manager is not personally liable for it solely because the person is a member or manager or acts in that capacity. Failure to observe ordinary company formalities is not by itself a ground for imposing liability on a member or manager. This protection does not prevent liability imposed by another law for the person’s own wrongful conduct or for an obligation the person personally guarantees. A court may impose an LLC obligation on a member only when the claimant proves both a unity of interest between the member and the LLC, shown by facts such as domination, commingling, undercapitalization, or misuse, and that respecting the LLC would produce fraud or an inequitable result.

Mia is the sole member of Harbor Tools LLC. Harbor Tools signed a $90,000 equipment lease in the LLC’s name. Mia signed the lease “Mia, solely as member of Harbor Tools LLC,” and she did not guarantee the lease. Harbor Tools had only $500 in its account when it signed the lease, and Mia regularly used that account to pay her personal rent and credit-card bills. After Harbor Tools stopped making payments, the lessor sued Mia personally, arguing that she used the LLC to evade the debt.

A director signs a corporation’s lease “Dana, director,” with no personal guarantee, but Dana personally drives the corporation’s truck negligently and injures a pedestrian. Dana may be personally liable for the personal tort, because official-capacity protection does not shield the actor from the actor’s own wrongdoing.

Recurring errors on this topic include:

• Treating a judgment against a partnership as automatically being a judgment against a partner without checking partner liability and enforcement.
• Holding an incoming partner liable for a partnership debt incurred before admission.
• Holding an outgoing partner free from a partnership debt incurred before dissociation.
• Treating a director’s name in a complaint as enough to make the director liable for a corporate debt.
• Treating an official corporate signature as a personal guarantee when the corporation was clearly identified.
• Holding an LLC member liable merely because the member owns all membership interests.
• Treating commingling or undercapitalization alone as automatic veil piercing.
• Using veil piercing when the facts instead show the owner personally committed the relevant tort.

In a standalone multiple-choice question, look for the entity, the individual undertaking, and the precise fact suggesting a shield exception. In an integrated question set, use the supplied statute, pleadings, contracts, and financial records to separate the company claim from a personal claim. In a performance task, identify the proper defendant, explain the uncertainty created by guarantees or veil facts, and ground the recommendation in the supplied authority.

High-Yield Points - ⚡ Biggest Takeaways

Entity debts do not automatically become owner or manager debts. Personal guarantees and personal wrongdoing bypass ordinary entity shields. Veil piercing requires unity of interest plus fraud or inequitable result.