A limited liability company (LLC) is a business structure authorized statutorily by states. An LLC is often a preferred business structure because, similar to a corporation, owners have limited personal liability for the debts and actions of the LLC. However, LLCs also have the benefits of a partnership by providing management flexibility and the benefits of pass through taxation.
As some business owners have learned the hard way, an LLC does not necessarily provide owners absolute protection from the liabilities and debts of the business. The reason that the owners are afforded the limited liability protection is because under the law the LLC is considered a separate and distinct entity from the owners. However, in some circumstances where a creditor or plaintiff is able to “pierce the corporate veil,” courts will ignore the limited liability status of the business and hold the owners or members personally liable for the business debts.
There is no bright line rule when the corporate veil is pierced for an LLC. However, there are several factors that courts will consider. These factors include:
- Whether the LLC is Treated as a Distinct and Separate Entity?
- Whether the LLC Engaged in Fraudulent Activity?
- Whether the LLC Was Adequately Capitalized?
- Whether the LLC Was Held by a Single Person or a Group of People Closely Related vs. a Large LLC with Many Members?
- Whether the LLC Adhered to LLC Formalities?
In order to ensure a business owner obtains the limited liability benefits of his or her LLC, there are certain practices the owner should commit to in operating the business. These practices include:
- Do Not Commingle LLC Assets with Personal Assets
- Have an Operating Agreement for Your LLC
- Adhere to LLC Formalities
- Do Not Divert LLC Assets for Personal Use
- When Winding Down the Business, Pay Creditors Before Drawing Out Assets For Personal Use
- Do Not Personally Guarantee the Debts of the LLC
- Identify the Business as an LLC on Card, Letterhead, Invoices, etc.
Klaproth Law represents many small and some large business owners in partnership disputes, breach of contract, theft of intellectual property, and other business disputes. In some circumstances, Klaproth Law will represent a business on a contingency basis, so we will not get paid unless your business wins. Contact us now to schedule a free, confidential, consultation to see how Klaproth Law can help your business win its next lawsuit.
