There are many advantages to forming an LLC; for example, members are protected from personal liability for business decisions or actions of the LLC. This means that when an LLC incurs debt or is sued, the members' personal assets cannot usually be touched. This is a key reason why business owners and managers frequently choose to form an LLC.
While members are generally protected from liability, they must keep in mind that limited liability does mean "limited liability." Members are not always shielded from wrongful acts, and this includes the reckless acts of their employees.
There are times when the courts will hold an LLC or corporation's owners, members, or shareholders personally liable for business debts. When the courts lay down the heavy hand of justice, it is called "piercing the corporate veil."
In light of the Great Recession, many small business owners are struggling to keep their doors open. If an LLC or corporation fails, the last thing a business owner wants is to be held liable for the failed business's debts.
When money is tight and owners aren't careful, there is a possibility that a creditor may sue for payment and a court may decide to "pierce the corporate veil," meaning lift the corporation or LLC's veil of limited liability and hold the owners personally liable for their business debts.
Effects of Piercing the Corporate Veil
If a court decides to pierce a company's corporate veil, this means that the members, owners, or shareholders of the LLC or corporation can be held financially liable for the company's debts. This gives creditors the right to go after an owner's home, their bank accounts, investments and other assets to satisfy company debts.
While the court will go after those responsible for the company's wrongful or fraudulent actions, they will not hold innocent parties liable for the company's debts.
Veil piercing mostly occurs with close corporations. While the laws vary from state to state, courts are generally against piercing the corporate veil, and will only use this method of recourse in cases of egregious behavior such as fraudulent conduct, the intermingling of personal and corporate assets, or undercapitalization at the time of incorporation.
Some of the factors considered by the court:
- Inaccuracy of corporate records
- Any fraudulent behavior
- Failure to pay dividends
- Intermingling assets
- Personal dealings
- Manipulation of the assets or liabilities
- Failure to observe corporate formalities
- Concealment of members
- Significant undercapitalization
- Siphoning of corporate funds
If a lawsuit is naming you and your business as defendants, or if a creditor is threatening to go after you personally in a lawsuit, you should retain a Bergen County business lawyer to defend yourself.
Attorney Michele L. Ross is a seasoned commercial litigation attorney whose professional accomplishments include being selected as a Bergen "Top Lawyer" for 2013, and 2014, and inclusion in the Super Lawyers® Rising Stars℠ for 2014.
Contact our office directly today, or fill out our online case evaluation form!