You could still be found liable...
Limited Liability Companies (LLCs) and, in Canada Limited Liability
Partnerships (LLPs) are popular business structures due to their limited personal liability protection for members. However, there are circumstances under which a judge may decide to allow "piercing the corporate veil" and impose personal liability on an LLC member. Understanding how this can happen is crucial for LLC members to protect their assets.
What is Piercing the Corporate Veil?
Piercing the corporate veil is a legal concept that refers to a court disregarding the limited liability protection that a corporation, LLC, or LLP provides to its owners. In other words, a court can impose personal liability on an LLC member if it determines that the LLC was functioning as an alter ego for the member's interests.
The Five Ways Judges Pierce the Corporate Veils and Impose Personal Liability on LLC Members
- Undercapitalization: If an LLC is underfunded at the time of formation, it can indicate that the member is using the LLC as an alter ego to avoid personal liability.
- Commingling of Personal and Business Funds: If an LLC member mixes their personal funds with the business funds, it can lead to confusion and blur the lines between the two entities, making it easier for a court to impose personal liability.
- Failure to Observe Corporate Formalities: If an LLC member fails to observe the formalities required by law, such as holding regular meetings and keeping proper records, a court may determine that the LLC functions as an alter ego and impose personal liability.
- Ignoring Corporate Separateness: If an LLC member treats the LLC as their own property and fails to maintain a clear distinction between personal and business assets, a court may pierce the corporate veil and impose personal liability.
- Fraud or Illegal Activities: If an LLC member places assets into an LLC just before or after litigation begins, the judge may consider that action “fraudulent conveyance” and disallow the transfer. Additionally, if the member engages in fraudulent or illegal activities, a court may impose personal liability, regardless of the limited liability protection the LLC provides.
Q: Can an LLC member be held personally liable in all circumstances?
A: No, an LLC member is not automatically personally liable in all circumstances. The five ways above are circumstances under which a court may pierce the corporate veil and impose personal liability.
Q: What steps can an LLC member take to reduce the risk of personal liability?
A: To reduce the risk of personal liability, an LLC member should adequately fund the LLC at the time of formation, maintain clear records and observe corporate formalities, maintain a clear distinction between personal and business assets, and avoid engaging in fraudulent or illegal activities. Additionally, the longer assets have been in the LLC, the greater the protection. The old saying “Better two years too early than one day too late” certainly rings true in asset protection matters.
You Can Protect Your Assets If You Act Decisively
The Five Ways Judges Pierce the Corporate Veils and Impose Personal Liability on LLC Members highlight the circumstances under which an LLC member may be held personally liable. Understanding these ways can help you protect your assets and reduce your risk of personal liability. There's always a risk of personal liability in your life. Consult with an asset protection specialist to understand the risks involved and take precautions.
Strengthen Your Asset Protection By Going Offshore
In almost all scenarios, an offshore LLC provides additional protection against liability resulting from piercing the corporate veil. First, many offshore jurisdictions have laws that are more favourable to limited liability companies and offer superior protection to their members. Second, when you create an offshore LLC in a country like Nevis or Belize, you benefit from more robust privacy protection, reducing the risk of personal liability.
Offshore LLCs of Nevis and Belize reside in jurisdictions with well-developed legal systems and robust privacy laws, which insulate you and the members of the LLC from personal liability because these countries will not recognize judgements from courts of other jurisdictions. The superior protection afforded by the Nevis orBelize LLC is especially beneficial for high-net-worth individuals or companies with significant assets, as it protects your assets from creditors or other legal actions. By setting up an offshore LLC, you take advantage of the added layers of protection that these jurisdictions provide, reducing your risk of personal liability and protecting your personal assets.
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