The Liability of Managers and Other Agents for Their Own Actions on Behalf of an LLC

The eponymous characteristic of the limited liability company (LLC) is that the LLC, as a separate legal entity, is liable for its obligations to others and that no other person, whether as owner or agent, is vicariously liable for those same obligations. Of course, an LLC, like any legal entity, must act through individuals or other legal entities with the authority to act on behalf of the LLC. The individual or legal entity with this authority may be known by a number of designations: managers, managing members, authorized persons, officers, or employees, or simply as agents (collectively “Actors”). Under all LLC statutes, the general rule is that the members of the LLC are not personally liable for obligations of the LLC, subject to such exceptions as personal guarantees or “piercing” of the organizational veil. This article discusses a different aspect of vicarious liability: when an Actor will be liable to a third party for actions taken on behalf of the LLC. It does not address the liability of the LLC (or its owners qua owners) to the third party or the relationship between the LLC and its Actors.
Whether an Actor will be personally liable to the third party for an obligation incurred by the Actor while acting on behalf of the LLC is a complex question which will turn on: (1) whether the obligation is based in contract or in tort; (2) whether the duty breached by the Actor is a duty to the LLC or to the third party; and (3) if the obligation is a liability for damages, whether the damages are physical harm to the person or property of the third party or for economic loss suffered by the third party.
Contract
Actors, in their capacities as agents of an LLC, are generally subject to the same rules applicable to other agents. The Restatement (Third) of the Law of Agency (“Restatement of Agency”) § 6.01(2) provides the general rule that an agent (here the Actor) is not a party to – and thus is not liable to – a third party on a contract between a fully-disclosed principal (here, the LLC) and a third party, even if the agent, in its representative capacity as such negotiates and performs the contract. This rule is based on the concept that the agent, in contracting, is creating a contract that is binding on its principal and that the third party is relying on the principal for performance under the contract. Thus, other than the agent’s duty to the principal and the agent’s warranty of authority to the third party insuring that the agent does have the legal power to bind the principal (Restatement of Agency § 6.10), the agent does not have an individual role in the contract between the principal and the third party.
This result can be modified by the agreement of the agent, as, for example, where the agent has agreed to become a party to, or guarantee, the contract. But as a general rule, when an Actor on behalf of an LLC enters into a contract with a third party, the third party’s relief under the contract is limited to the LLC. The Actor’s conduct in entering into or performing the contract is immaterial to the liability for breach and the third party’s exclusive remedy is against the LLC. If the Actor is performing the contract on behalf of the LLC, the only person to whom the Actor is answerable is the LLC.
Tort
The Restatement of Agency has a different rule when an agent commits a tort that results in damage to a third party. Section 7.01 of the Restatement of Agency provides that an agent is liable to a third party harmed by the agent’s tortious conduct, irrespective of whether the agent is acting in a representative capacity or whether the principal is also liable to the third party. This rule is well-demonstrated by the idea that an Actor who negligently causes an automobile accident while driving in the course of his or her duties as Actor on behalf of an LLC is nonetheless personally liable to the third party injured in the accident. This is true regardless of whether the LLC is also liable to the injured third party. As discussed below, many LLC acts recognize this rule, although they recite it in different ways.
Not all tortious conduct of an agent that results in liability to a third party will subject the agent to liability to the third party. As explained in Section 7.02 of the Restatement of Agency, the tort must violate a duty owed directly by the agent to the third par