LLC’s aren’t bulletproof.
We refer you to an interesting article by Robert J. Mintz, JD., an attorney specializing in asset protection planning. He presents a bit of history illustrating ways that courts have pierced the corporate veil and how these exceptions to the protections anticipated by those who create S-corps ad C-corps can also apply to those who create LLCs.
If the shareholders of a corporation treat it as their alter ego and fail to follow the rules set forth in state law, the shield against personal liability will not be applied. The article says…
Over the years, courts have enumerated dozens of factors that should be considered in making this determination. Some of those examples mentioned frequently in the cases include: (1) commingling of funds and other assets, (2) the treatment by an individual of the assets of the corporation as his own, (3) the failure to maintain minutes or adequate corporate records, (4) the use of the same office or business location, employment of the same employees and/or attorney, (5) the failure to adequately capitalize a corporation, and (6) the use of a corporation for a single venture.
In making the determination under the alter ego test, the law is that no single factor is determinative, and instead a court must examine all the circumstances to determine whether to apply the doctrine. In reality, what this means is that in almost any situation, a finding of alter ego liability can be made depending on the outcome that the court would like to produce.
In recent years, these factors and many others have been applied to piercing the LLC veil as well. To avoid personal liability, owners must follow the rules… all of them.
If you are considering the formation of an LLC to protect your assets, make sure that you discuss the requirements with an experienced business attorney in your state. Make sure that the documents used to establish the LLC are properly prepared and maintained.