Case Study: Tort Liability in an LLC

April 13, 2006

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Let's say Smith, Jones, and White are all physicians and operate a medical practice, which is organized as a limited liability company (LLC).

Now let's say Smith commits an act of malpractice. Smith has unlimited, personal liability for this tort because he committed it. The LLC also has unlimited, personal liability automatically because of the respondeat superior doctrine.

The other two co-owners, Jones and White, have limited liability. The most they can lose is what they have invested, at the time, in the LLC (i.e., they have no personal liability for this tort).

Now let's say the practice (specifically the LLC) hires another physician who is not a partner in the business. This doctor commits an act of malpractice. Assuming there has not been an independent act of negligence by one of the partners (such as negligent hiring or supervision), liability will be as follows: this physician will have personal liability because he committed the tort and the LLC will have personal liability under the respondeat superior doctrine.

All three owners will have only limited liability, and no personal liability, for this tort.

Now let's say if it can be proven that the three co-owners committed negligence in failing to properly train and supervise this employee, the three co-owners will have unlimited, personally liability for their tort and, effectively, for the employee's tort.

Technically, the three co-owners are not liable because of the act of malpractice committed by this employee. Nor are they liable because of the doctrine of respondeat superior. They are liable for their own independent act of negligence. This is consistent with the general rule that an individual is liable when he personally commits a tort.

The same result would occur if the three co-owners were negligent in hiring the employee. This could happen, for example, where the owners failed to conduct a background check to verify the employee's credentials, arrest records, credit rating, work history, etc., and one or more of these failings were a factor in the employee's malpractice.