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Can members and managers of an Illinois LLC still operate confidently knowing they may no longer be immune to liability under the recent changes to the law? In this article, we discuss how the Illinois LLC Act was amended effective January 1st, 2020, and answer the following questions:
- How was tort liability handled for Illinois LLCs before 2020?
- How is tort liability handled for Illinois LLCs in 2020?
- What does this ultimately mean for members and managers of an Illinois based LLC?
Limited liability companies have been a popular legal business entity for many years. Considered a hybrid business structure, an LLC combines the beneficial aspects of corporations and sole-proprietorships into a model that is friendly to medium and small businesses. LLCs offer considerable flexibility in their organizational structure, can insulate members and managers from personal liability, and are subject to fewer restrictions than large corporations. For businesses looking to preserve a degree of casual informality, while also gaining the tax benefits of larger companies, an LLC is a great option. However, 2020 has brought with it a few changes to the laws affecting the liability of members and managers in an LLC.
How Was Tort Liability Handled For Illinois LLCs Before 2020?
Before the Age of Covid-19, Illinois LLC members and managers enjoyed protection from civil liability for nearly any tortious acts. This shielding from liability became baked into the law after two state appellate rulings, Dass v. Yale, and Carollo v. Irwin. In both cases, the court found that members and managers of an Illinois LLC, could not be held personally responsible for wrongful acts, including fraudulent conduct. The decisions were based on the interpretation of the Limited Liability Act, at that time, specifically the section reading: “The debts, obligations, and liability of a limited liability company, whether in contract, tort or otherwise, are solely the debts, obligations and liability 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.”
Essentially, as long as the members and managers were acting on behalf of the company they enjoyed a wide-range of protections from liability.
How Is Tort Liability Handled For Illinois LLCs In 2020?
The amendment to section 10-10 of the Limited Liability Act effectively removed the personal liability protections for tortuous wrongdoing. The amendment goes on to specifically cite the rulings in Dass v. Yale and Carollo v. Irwin, overruling those decisions and the previous interpretation of the law, and being clear that future episodes of fraudulent conduct by a member or manager of an LLC may not be protected even if they are operating on behalf of their LLC.
What Does This Ultimately Mean For Members and Managers Of An Illinois Based LLC?
With the new law, fraud claims against members and managers of Illinois LLCs will become commonplace. Because insurance only covers unintentional or unknown events, and fraud is considered an intentional act, members and managers won’t be able to rely on insurance to cover the costs of legal fees and restitution. This leads to individuals, not the company, being forced to defend against claims of fraud at their own expense. It may also increase the chance that benign contract claims will be twisted into fraudulent claims. Managers and members of an Illinois LLC will need to take extra precaution when conducting business going forward, the days of operating with impunity have passed.
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