IX. Acting on Behalf of an Llc before It Is Formed

• Library: South Carolina Limited Liability Companies (SCBar) (2020 Ed.)

IX. Acting on Behalf of an LLC Before It Is Formed

It is probably fair to state that generally, members and managers are likely not protected for wrongs or actions they take prior to the formation of their LLC. Carter G. Bishop & Daniel S Kleinberger in their treatise, Limited Liability Companies: Tax and Business Law, "¶ 6.02 LIMITS OF THE SHIELD: PERSONAL LIABILITY DUE TO FALSE OR DEFECTIVE LLC FORMATION." provide an analysis as to when a member of an LLC may be personally liable for actions if the LLC has been defectively formed. This helpful treatise is updated on a regular basis and is available on Westlaw.

Although there are apparently no South Carolina LLC cases, cases from other jurisdictions may be helpful. In a rather unusual case,⁸⁷ the defendant members, who committed wrongs prior to forming their LLC, argued that they were protected by the typical Delaware statute that says that members are not liable solely because they are LLC members.

In this particular case, prior to forming their LLC, the members misrepresented the status of a 66-acre tract of land they owned and were selling. Although they knew that their tract contained substantial wetlands (which the buyer's expert missed), they failed to disclose the wetlands, although aware that it would prevent the buyer's intended use of the property. After an option contract was signed, the sellers formed an LLC and conveyed the property to the LLC (subject to the option). The LLC then closed on the option, and transferred the property to the buyer. When the buyer sued the members individually, they asserted that the statute, § 18-303 — protects us since we were "solely members." The court had no trouble rejecting the argument.

Because the facts alleged in the complaint establish that the LLC was not formed (and the Property was not acquired by the LLC) until after the allegedly critical wrongful acts had been committed, it follows that the defendants could not have been acting "solely as members of the LLC when they committed those acts." Therefore, the defendants are not protected by § 18-303.⁸⁸

A fairly recent case from California may also be helpful.⁸⁹ The Allens were induced by David Packer to become "HydroFuture" dealers in Texas, selling "HydroZilla Units" (devices once installed on diesel engine trucks are purported to produce hydrogen that is injected into the diesel fuel engine intake and thus increase engine power while reducing fuel consumption and exhaust emissions). Packer's...