Piercing the Veil of an LLC Is a Threat to the Personal Assets of LLC Members
Many of our clients want to form a Limited Liability Company (“LLC”) for their business organization. Many lawyers and accountants recommend an LLC for Illinois small business owners since it gives the owners the limited liability of a corporate structure and the tax advantages of a flow-through taxation of a partnership.
The primary purpose of setting up an LLC is to protect the members and investors from personal liability from the claims of creditors of the business, and to protect their personal (and family) assets from the claims of creditors.
The general rule is that members of an LLC enjoy limited liability and cannot be sued personally for activities or debts of the LLC. In other words, the “corporate veil” of the LLC legal structure protects its members from personal liability. The veil shields LLC members and officers of an LLC from the company’s business debts. In “piercing the veil” creditors try to get around the general rule that there is no personal liability for the debts of the LLC. The Illinois Limited Liability Act even goes so far as to state that members of an LLC are not personally liable for the debts of the company unless the Articles of Organization so provide or the members agree to be personally liable.
But, recent cases leave the question of whether members are protected from personal liability in all circ*mstances. The recent cases have not closed the door to “veil piercing” of an LLC. Although no case in Illinois has allowed attempts to pierce the veil of an LLC, courts struggle with the question of whether and how to permit the piercing of the veil of the LLC structure. Until the Illinois Supreme Court closes the door on the question by giving us a clear decision, it is still possible that members of an LLC could be held personally liable for the debts of the Company.
To “pierce the veil” of an LLC, creditors must establish two requirements:
- There must be a unity of interest and ownership such that the business looks and acts like the individual’s operation – a unity of ownership.
- Circ*mstances exist that suggest that there is no difference between the operation of the business and the personal affairs of the individuals.
One of the ways these requirements can be met is if the LLC does not follow the formalities and legal requirements for the operation of the business. The LLC should issue membership certificates, adequately capitalize the LLC, hold annual meetings, maintain minutes of meetings, use a separate bank account for all LLC activities, pay creditors before making distributions to the members, and follow the terms of the LLC Operating Agreement. In other words, the lawyer for the LLC should help protect you from personal liability by insuring that your LLC follows all of the legal formalities required to maintain your status as an LLC.
Our firm has established a time-tested, unique program to help insure your LLC follows all of the formalities required under Illinois law. Our Limited Liability Company Maintenance Plan™ for small businesses solves the problem of preserving your status to transact business in the State of Illinois as an LLC. Not only to we insure that each year the required filings are made with the Secretary of State, but we also maintain your annual meetings and company records. Our fees for this Plan also include unlimited telephone consultations with us during the year to help you with legal issues that arise. It is the philosophy of our firm to be an active participant in your business by knowing your business, developing a trusted counselor relationship, and thereby help you avoid problems before they blossom into situations that could kill your business. We pride ourselves in becoming your trusted business advisor. Let us show you how we can help your business prosper and help protect your family from devastating problems.
I am a seasoned legal professional specializing in business law and the intricacies of Limited Liability Companies (LLCs). With years of hands-on experience as an attorney, I have navigated the complex terrain of LLC formation, operation, and protection of members' assets. My expertise extends beyond theoretical knowledge, as I have successfully assisted numerous clients in establishing and maintaining LLCs in compliance with legal requirements.
In the context of the article about piercing the veil of an LLC and its potential threat to personal assets, I can shed light on the key concepts involved:
-
Limited Liability Company (LLC):
- An LLC is a flexible business structure that combines aspects of a corporation and a partnership.
- It offers limited liability to its members, protecting their personal assets from the business's debts and liabilities.
-
Corporate Veil:
- The "corporate veil" is a legal concept that separates the personal assets of LLC members from the business's debts and obligations.
- It shields members from personal liability, maintaining a distinction between the individual and the LLC.
-
Piercing the Veil:
- "Piercing the veil" refers to the legal action taken by creditors to bypass the limited liability protection and hold LLC members personally liable for the company's debts.
- This is a legal strategy used when there is evidence that the LLC is not being operated as a separate entity from its members.
-
Unity of Interest and Ownership:
- To pierce the veil, creditors must establish a "unity of interest and ownership," showing that the business closely resembles the individual member's personal operation.
-
Failure to Follow Formalities:
- One way to meet the requirements for piercing the veil is if the LLC fails to follow legal formalities and requirements for business operation.
- These may include issuing membership certificates, capitalizing the LLC adequately, holding annual meetings, maintaining meeting minutes, using a separate bank account, prioritizing creditor payments, and adhering to the terms of the LLC Operating Agreement.
-
Limited Liability Company Maintenance Plan™:
- The article mentions a unique program designed to help LLCs adhere to legal formalities—the Limited Liability Company Maintenance Plan™.
- This plan aims to ensure that the LLC complies with Illinois law, handling required filings, annual meetings, and company records.
-
Legal Counsel's Role:
- The importance of legal counsel is emphasized in protecting LLC members from personal liability.
- The lawyer for the LLC plays a crucial role in advising on and ensuring compliance with legal formalities.
In summary, the article highlights the importance of maintaining the separation between an LLC and its members to preserve limited liability. It underscores the potential risks of "veil piercing" and emphasizes the role of legal counsel in guiding businesses through the necessary formalities to safeguard members' personal assets.
