Liability for the debts of an LLC: what is the liability of the company, its directors and partners?

A limited liability company is the most popular type of company mainly due to its simplicity and limited liability of its owners (partners) for liabilities. But how does "limited liability" for debts work in practice? Find out if and what the partners, the managing directors and the company itself are liable for.

Bodies in a limited company and their roles

Every company is legally obliged to set up certain bodies. In the case of an LLC, these are:

How are the LLC and its bodies liable for debts?

Once you are clear on how the organs of a limited company work, it is easy to understand to what extent and why they are liable for any debts of the company.

1/ Liability of a member of an LLC.

The liability for the LLC's debts of the members as owners and ultimate authority is based on the following basic principles:

• all are jointly and severally liable;
• their liability for debts is limited;
• they are liable only up to the amount of their outstanding contribution.

If the company is owned by more than one partner, the liability of each of them ceases only after all the partners of the LLC have paid their deposits. Since the partners are jointly and severally liable for the company's debts, any debt would be recovered from each of them - regardless of whether or not the individual has already paid his or her contribution.

2/ Responsibilities of the managing director of an LLC.

The responsibilities of a managing director stand on the diligence of a good housekeeper. This means that he or she must approach the performance of the function:

• Personally and loyally;
• with the necessary knowledge and care;
• in accordance with the best interests of the company.

If a managing director violates these principles, and thereby harms the company, he or she must repay the benefit he or she has received. Even if the mistake was made negligently and he or she was not even aware of it at the time - for example, if, as the statutory body of an LLC, he or she negotiates a loan that the company is unable to repay or fails to collect an enforceable debt. If he caused damage to the company, he must compensate for it from his own assets.

Thedamage caused may be:

• property - such damage can easily be expressed in money and can be compensated with money;
• non-pecuniary - this is for example a situation where the managing director's mistake has caused damage to the company's reputation or loss of know-how, which is difficult to quantify.

If the negligence of a good manager has caused the company to go bankrupt, the liability of the managing director for the debts is decided by the insolvency court, which formally declares the company bankrupt and assesses whether the managing director could or should have known about the bankruptcy and whether he or she took the necessary steps to avert it.

If the insolvency court proves that the managing director is guilty, it can punish him with several types of penalties - from the obligation to provide benefits up to the difference between the total debts and the value of the company's assets, to the restitution of the benefit with which he has been unjustly enriched, to the prohibition of the managing director's activity for a minimum period of 3 years.

Beware that a breach of the duty of care can have not only civil but also criminal consequences - for example, if a creditor is harmed or if there is gross mismanagement of someone else's property.

3/ Liability of an LLC for debts

A limited liability company, like any other legal entity, is liable for its debts with all of its corporate assets. This typically includes money in bank accounts, real estate, inventory, machinery, equipment, as well as other assets such as copyrights.

We can help you not only with liability issues

Are you thinking of setting up an LLC? We can help you start your own business and provide you with a registered office in Prague or Brno without having to pay for a physical office. And if you are already in business and are planning, for example, to change partners or managing directors, we can handle this agenda as well! Contact us via the form below.

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