Assume you are part of an accounting firm, and your firm has provided a large amount of accounting services for a client that is a limited liability company. The outstanding receivables for providing said services have started to accumulate to a large figure. You want to proceed legally against the LLC but you see that the LLC is being sued by multiple creditors. By all accounts the LLC itself is judgment proof, and you do not have a personal guaranty of financial responsibility signed by any of the LLC’s members. Is there any way to proceed against the limited liability company’s members? More specifically, is there any way to proceed against the LLC’s dominant member?
The answer depends on how dominant that LLC member was. In certain circumstances, the courts will allow a creditor to “pierce the corporate veil” against the LLC member if the member took a level of actions that would make the member liable for the LLC’s debts.
Actions that Make LLC Members Liable for LLC Debts
There are a number of standards that the member’s actions would have to meet in order for them to be liable for the LLC’s debts. One is the regular or systematic diverting of assets for personal benefit of related individuals and companies, so that the conveyances, made without fair consideration, left the LLC with unreasonably low assets, and in doing purposefully left the LLC with accumulated debt beyond the ability to pay or with the intent to defraud creditors.
Another standard is control. The following factors must be considered when determining whether piercing the corporate veil against an LLC member is appropriate.
- Did the LLC member operate the entity without regard to corporate formalities or fiscal structure?
- Did the member commingle funds of the LLC with the member’s own funds?
- Did the member fail to record transfers of funds to the member in the LLC’s books?
- Did the member use the LLC as a shell company to borrow funds for the benefit of other entities?
If an LLC has a limited member who acts beyond the authority vested in them and starts taking out loans in the name of the LLC for purposes of making distributions to themself and also doesn’t keep records of any of the transfers, they would be an appropriate defendant in an action to pierce the corporate veil.
LLC members can be held personally liable to the extent that a complaint pleads a claim for tort since a corporate officer or LLC member who participates in a tort can be held personally liable, even if for the LLC’s benefit.
Finally, was the member doing business in the LLC in their individual capacity; shuttling funds to their personal account to suit that member’s immediate convenience?
In order to pierce the corporate veil against an LLC member, you must demonstrate that the member dominated the LLC and that domination was the instrument that either resulted in fraud or wrongful or inequitable consequences. Forensic accounting may be required to determine whether the LLC member exerted dominance and control to the standard necessary to hold that member liable for the LLC’s actions.
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