Should your New York LLC defend, indemnify, and hold harmless its LLC Members or Managers?
When forming an LLC in New York, you’ll come across the following Optional Liability Statement:
“The Limited Liability Company shall defend, indemnify and hold harmless all Members, Managers, and former Members and Managers of the Limited Liability Company against expenses (including attorney’s fees, judgments, fines, and amounts paid in settlement) incurred in connection with any claims, causes of action, demands, damages, liabilities of the Limited Liability Company, and any pending or threatened action, suit, or proceeding.”
What does that mean?
First, this optional statement has nothing to do with your LLC protecting your personal assets. Your personal assets are still protected regardless of whether you check the box or not.
This Optional Liability Statement has 3 parts:
- hold harmless
Each of these would “kick in” if an LLC Member/Manager was sued as a result of actions taken on behalf of the LLC.
Let’s break down each part:
Also known as: a “duty to defend”.
This means that the LLC must pay for legal expenses, like attorney’s fees, for the LLC Member/Manager.
Also known as: an “obligation to indemnify”.
This means that the LLC must pay for any losses or liabilities that arise from such a lawsuit. This includes damages, fines, expenses, costs, and penalties.
Said the opposite way, the LLC Member/Manager would not have to pay for these losses or liabilities.
3. Hold Harmless
Also known as: an “obligation to hold harmless”.
There are two “subparts” to hold harmless.
First, this means that the LLC will take the blame for any damages as a result of the LLC Member’s/Manager’s actions.
Second, this means the LLC will not place the blame on the LLC Member/Manager, even if it is that person’s fault.
Should you check off the NY LLC Optional Liability Statement?
Most people don’t check off this statement.
Why? Checking off this statement means your LLC has to defend, indemnify, and hold harmless any LLC Member or Manager in all circumstances.
Most LLC owners prefer to address this on a case-by-case basis.
Should a Single-Member LLC indemnify its Member?
If you have a Single-Member New York LLC, it doesn’t matter one way or the other, since your interests and the LLC’s interest are the same.
Should a Multi-Member LLC indemnify its Members/Managers?
Most owners of Multi-Member New York LLCs don’t check off the statement. They prefer to address situations on a case-by-case basis.