I’ve had conversations with business owners who are operating as an LLC that have led me to today’s post. In these conversations it’s clear that most business owners believe that the concept of “piercing the corporate veil” doesn’t apply to them. After all, they’re an LLC not a Corporation. Right?
Well, the answer is more like, “There’s reason for caution here.” Why?
Let me share with you a specific court case that sheds some light on my answer.
The Stone v. Hobby Decision
In Stone v. Frederick Hobby Associates II, LLC, the court found that the “instrumentality and identity rules” could be applied, under the facts of the case, to “pierce the corporate veil” of an LLC and hold the individual members personally liable. The plaintiffs, husband and wife, were both physicians. The plaintiffs had entered into a sales agreement with the defendant Connecticut LLC in December 1999 to purchase a residence in Greenwich, Connecticut, for $3,300,000. The home had been only partially completed at the time the sales agreement was executed. The sales agreement contained certain express warranties concerning the condition of the premises, and provided for the completion of certain “punch list” items within 60 days of date after the date of the agreement.
The plaintiffs subsequently filed a lawsuit, alleging defects in the subject property, and that the defendant had failed to complete all the punch-list work. The plaintiffs further alleged the defendant had, on or near the closing date for the purchase of the premises, transferred substantially all of its assets, including the proceeds from the sale of the subject property, to another LLC and to private individuals, including the sole members of the original LLC.
After a court hearing, the court granted the plaintiffs’ application for the statutory prejudgment remedy, and ordered disclosure of the assets of the defendant LLC members. In essence, the court “pierced the veil” of the defendant LLC.
The court further stated that “[t]he limitation on liability provided by incorporation or the formation of a limited liability company is not . . . without boundaries.”. The court held that the same rationale that applies in connection with piercing the corporate veil also applies in the case of an LLC. The court stated further that “[t]he instrumentality and identity rules may be applied in order to ‘pierce the corporate veil’ of a limited liability company.”
Turning to the facts of the case, the court found the defendants were the sole members of the LLC, and that the LLC office was located in a private home (although the LLC did not pay any rental for the space). The court also noted that the LLC never had any assets other than the residential property that the plaintiffs purchased from the LLC and which was now owned by the plaintiffs. Particular attention was paid to a statement made by an attorney for the defendant LLC members to the plaintiffs, “go ahead and sue us. There is no money in [the LLC]. Why do you think we set it up as an LLC in the first place?”
Conclusion
There is no apparent good reason why the “piercing the corporate veil” doctrine should not be applied to LLCs when the facts are comparable. Unless future case law suggests otherwise, the only prudent course for LLC owners to follow is to assume they will be held to the same compliance standards and practices as owners of corporations.
Other lessons from this case: establish a clear and separate identity for the LLC apart from its constituent members (including a separate office, stationery, books, and assets); clearly designate the LLC as the entity entering into and executing business agreements and contracts intended to bind and benefit the LLC; and don’t “dare” potential plaintiffs sue by arguing that “the LLC doesn’t have any money or assets you can reach, and that’s the reason we formed it.”
If you are operating an LLC, I would strongly recommend you speak with the folks at Bulletproof Veil. Either visit their website, or give them a call at 1-888-716-3180.
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