Business Asset Protection – Part 1 ½

Piercing the Corporate/LLC Veil, or ‘Through the (Creditor’s) Looking Glass’?

“What It Is?”

In Part 1 of Business Asset Protection, we took up ‘Piercing the corporate (or LLC) veil.’ As we stated there,

‘piercing the veil’ … is a legal principle sometimes used by courts to ignore the normal liability shield associated with a corporation or LLC. What happens is that a creditor or claimant alleges the entity is being used for fraud or some other wrongful action affecting the creditor. If the court agrees, it might permit the creditor to satisfy its judgment against the assets of the owners of the corporation or LLC.

‘Piercing the veil’ works pretty much the same way for a corporation as for an LLC. The creditor or other plaintiff claims the entity was used to perpetrate some fraud, wrong or injustice. Then the court looks at a laundry list of factors to decide whether to allow the liability ‘veil’ to be pierced, including:

• “Shell or Zombie Entity” – Not having capital or business assets appropriate to operate the entity
• “Personal Piggy Bank” – In which the owners commingle personal and company funds or assets; or perhaps they consistently fail to deal with the entity on an arms-length basis
• “Winging It” on Transactions – Absent or inadequate company records, including minutes or resolutions (probably not as applicable to an LLC as a corporation) and also accounting records
• “Operating Agreement? What’s That?” (or Bad One) – Not having decent organic documents: LLC operating agreement or, for corporations, Bylaws and Board resolutions

The preceding factors more or less boil down to a failure to respect the corporation or LLC as a legal entity separate from the owners.

“The Curious Case of the Single Owner Company”

“But those things don’t matter if I’m a single member LLC, right?” Wrong! As one national expert on creditors’ rights put it, “single-member LLCs are fundamentally lousy asset protection vehicles.”

Why is that?? Usually, it’s because the owner did not bother to set up and run their company so as to avoid the traps listed above. So the company hasn’t been treated as separate from the owner. Often, folks just get themselves set up with the Secretary of State and let it go at that.

Lawyers Company Service, Ltd. is owned and operated by a New Mexico attorney. We will make sure you are set up correctly and point you in the right direction to help you avoid those traps.