Piercing the Corporate Veil: Just how limited is your liability if you own a limited liability company?

December 30, 2014

The limited liability company (“LLC”) has become the business entity of choice for small business owners in the United States. The LLC, a partnership and corporation hybrid, offer its owners (sometimes called “members”) the pass-through taxation benefits of a partnership or sole proprietorship with the limited liability protections of a corporation. 

Many LLC owners believe the liability protections provide an impenetrable shield for their personal assets, completely protecting these assets from the LLC’s creditors or claimants. However, under certain circumstances, a creditor or claimant may “pierce the corporate veil” of the LLC and hold the LLC’s owners personally liable for the LLC’s debts and actions. 

Under Ohio law, a creditor or claimant may attempt to pierce the corporate veil when (1) an LLC’s owner has complete control or dominion over the LLC, (2) the owner exercised such control in a fraudulent or illegal manner that was detrimental to the creditor or claimant, and (3) the creditor or claimant suffered injury or loss as a result of such control. When a creditor or claimant makes a showing of these three elements, the court may disregard the LLC entity and hold such owners personally liable. 

Examples of fraudulent or illegal conduct which might give rise to a claim for piercing the corporate veil are misrepresentations by the owner, intermingling LLC assets with the personal assets of the owner and failure to maintain accurate corporate records. 

As such, owners of an LLC are wise to remember that, as its name implies, the protections afforded by an LLC are “limited” and do not afford owners a license to act in any manner they see fit. If you own, or are thinking of starting, an LLC and have questions about personal liability, please contact an attorney in RCO Law’s Business Law Group.

 

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