Piercing the LLC Veil

Piercing the LLC Veil Why LLCs Aren’t Bulletproof By Robert J. Mintz, JD. Many people use Limited Liability Companies to hold investment assets and real estate or to operate a business. LLC’s are generally easier to form than corporations, have fewer formal operating requirements and offer a greater variety of tax planning options. Limiting Personal Liability Most importantly for some, the basic tenet of LLC law is that members and managers of the LLC are not personally liable for the debts of the company. This is known in legal terms as limited liability and it prevents a creditor of an LLC (or a corporation) from pursuing the personal assets of an owner. The problem is that the purported protection of the LLC law is often and increasingly disregarded by the courts under a variety of legal theories leaving personal assets exposed and unprotected from business risks – exactly the result that the owner was attempting to avoid. In this month’s article we’ll address the reasons why the courts are reaching these surprising conclusions and what steps can individuals take to protect themselves from unexpected and possibly significant financial losses. This limitation on liability is a crucial factor in operating or investing in a business venture. An investor wants certainty that personal assets, not invested in the business, are free from any potential claims which might arise. The concept of limited liability permits an individual to calculate the extent of the financial risk which is being assumed in relation to potential profits from the business. If a particular project involves a fixed investment of $100,000 then the risk and potential returns can be estimated and a rational decision about the value of the investment is possible. Limitations on personal liability are a foundation of any market economy because no individual or company would knowingly make an investment if the total cost of the investment, including potential liabilities, could not be reasonably calculated in advance. For example, suppose that the initial $100,000 amount invested in the business was not limited in any manner and instead the total amount of the investors net worth – everything that the investor owned – was subject to a future claim of the business? That proposition is difficult or impossible to evaluate because in this case, the amount of the investment and potential liabilities cannot be accurately measured in advance and the value of the investment is uncertain. Individuals are justifiably reluctant to make investments which place all of their personal assets at risk and the typical solution is to use an LLC or corporation which is intended to limit this exposure. CONTINUE READING ARTICLE