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Can you post some cases or background regarding piercing the corporate veil for an LLC based on "transacting business on behalf of the company in a role that do

by theoj 16y ago

Can you post some cases or background regarding piercing the corporate veil for an LLC based on "transacting business on behalf of the company in a role that does not legally exist"? Who is to say what does or doesn't exit? Based on this logic, a large LLC or LLP would be required to have its whole hierarchy listed in the operating agreement.

rprasad 16y ago
Bad news: there aren't any landmark cases. The area is so new that most states haven't even had this issue come up in court yet. However, I can tell you that the general consensus is that LLCs borrow from corporate law where piercing the veil is concerned. Veil-piercing isn't about "transacting business on behalf of the company in a role that doesn't legally exist." That's an indemnity issue (the LLC is trying to shuffle blame from itself to an employee). Veil-piercing is about going after the owners of a company on the grounds that the company is really just an extension of the owners' will and bank accounts. Key factors for veil-piercing (for an LLC): - Owners use the LLC funds for personal expenses without reimbursing the LLC. - Zero/below-market loans from the LLC to the owners. - LLC business decisions made to benefit the owners rather than the business. - Undercapitalization (LLC not have enough money to pay its bills/expenses/liabilities without the owners covering some of these expenses). There are more, but those are the big ones. The piggy-bank, low-interest-loan, and undercapitalization factors are usually the most important.
- theoj 16y ago
  >> Veil-piercing isn't about "transacting business on behalf of the company in a role that doesn't legally exist." That's what I thought, because it doesn't make sense. But I wanted to give him a chance to defend his statement.
- rosenjon 16y ago
  "Veil-piercing isn't about "transacting business on behalf of the company in a role that doesn't legally exist." That's an indemnity issue (the LLC is trying to shuffle blame from itself to an employee)." No... you are confusing the issue. By way of example, let's say that I am running a member (owner) managed LLC. My official title under state law is "Member". But I sign all my documents with customers and suppliers as "CEO". Then, the company goes broke, and owes money to its suppliers. The suppliers could argue that I did not represent the company in good faith, because I was not the CEO of the company. That position doesn't exist. So they might want to come after me personally instead. Depending on the laws of your state, the court may agree that you did not represent the company in good faith, and allow your suppliers to pierce the veil and come after your personal assets. The only way to shift blame to an employee would be in cases of fraud or gross negligence, and even then, your company would probably still be liable. What I am discussing is only really relevant in cases where the owner and manager are one and the same (as in the case of the original poster's situation). This doesn't apply to employees who may sign on behalf of the company for routine transactions, but don't have any controlling interest in the company. However, as a manager, it is best to make sure that anyone with signatory authority in your company is given such authority in the operating agreement. However, there is no such thing as piercing the veil with regards to an employee of a company who does not have a substantial ownership stake. They will always come after the owners of the company if it seems that the company is a sham to protect personal assets. The more loosely you operate your company without specific legal agreements (ie operating agreement), the more likely someone will be able to prove that the company is a sham.
rosenjon 16y ago
That's the point of the operating agreement. It says what does and does not exist. To quote from Nolo.com (http://www.nolo.com/legal-encyclopedia/llc-operating-agreement-30232.html http://www.nolo.com/legal-encyclopedia/llc-operating-agreeme...) : "The main reason to make an operating agreement is to help ensure that courts will respect your limited personal liability. This is particularly key in a one-person LLC where, without the formality of an agreement, the LLC will look a lot like a sole proprietorship. Having a formal written operating agreement will lend credibility to your LLC's separate existence." The operating agreement usually specifies that the member can operate all aspects of the business, including hiring, firing, etc. So authority flows from the member in terms of other people's titles, and it is not necessary to specify lower level employee's title in the operating agreement. It is, however, necessary to specify the relationship of each owner in an LLC to the business if they will be transacting business on behalf of the company. This ensures that the veil between personal and company property remains intact.

by theoj 16y ago

rprasad 16y ago

Bad news: there aren't any landmark cases. The area is so new that most states haven't even had this issue come up in court yet. However, I can tell you that the general consensus is that LLCs borrow from corporate law where piercing the veil is concerned. Veil-piercing isn't about "transacting business on behalf of the company in a role that doesn't legally exist." That's an indemnity issue (the LLC is trying to shuffle blame from itself to an employee). Veil-piercing is about going after the owners of a company on the grounds that the company is really just an extension of the owners' will and bank accounts. Key factors for veil-piercing (for an LLC): - Owners use the LLC funds for personal expenses without reimbursing the LLC. - Zero/below-market loans from the LLC to the owners. - LLC business decisions made to benefit the owners rather than the business. - Undercapitalization (LLC not have enough money to pay its bills/expenses/liabilities without the owners covering some of these expenses). There are more, but those are the big ones. The piggy-bank, low-interest-loan, and undercapitalization factors are usually the most important.

theoj 16y ago
>> Veil-piercing isn't about "transacting business on behalf of the company in a role that doesn't legally exist." That's what I thought, because it doesn't make sense. But I wanted to give him a chance to defend his statement.
rosenjon 16y ago
"Veil-piercing isn't about "transacting business on behalf of the company in a role that doesn't legally exist." That's an indemnity issue (the LLC is trying to shuffle blame from itself to an employee)." No... you are confusing the issue. By way of example, let's say that I am running a member (owner) managed LLC. My official title under state law is "Member". But I sign all my documents with customers and suppliers as "CEO". Then, the company goes broke, and owes money to its suppliers. The suppliers could argue that I did not represent the company in good faith, because I was not the CEO of the company. That position doesn't exist. So they might want to come after me personally instead. Depending on the laws of your state, the court may agree that you did not represent the company in good faith, and allow your suppliers to pierce the veil and come after your personal assets. The only way to shift blame to an employee would be in cases of fraud or gross negligence, and even then, your company would probably still be liable. What I am discussing is only really relevant in cases where the owner and manager are one and the same (as in the case of the original poster's situation). This doesn't apply to employees who may sign on behalf of the company for routine transactions, but don't have any controlling interest in the company. However, as a manager, it is best to make sure that anyone with signatory authority in your company is given such authority in the operating agreement. However, there is no such thing as piercing the veil with regards to an employee of a company who does not have a substantial ownership stake. They will always come after the owners of the company if it seems that the company is a sham to protect personal assets. The more loosely you operate your company without specific legal agreements (ie operating agreement), the more likely someone will be able to prove that the company is a sham.

rosenjon 16y ago

That's the point of the operating agreement. It says what does and does not exist. To quote from Nolo.com (http://www.nolo.com/legal-encyclopedia/llc-operating-agreement-30232.html http://www.nolo.com/legal-encyclopedia/llc-operating-agreeme...) : "The main reason to make an operating agreement is to help ensure that courts will respect your limited personal liability. This is particularly key in a one-person LLC where, without the formality of an agreement, the LLC will look a lot like a sole proprietorship. Having a formal written operating agreement will lend credibility to your LLC's separate existence." The operating agreement usually specifies that the member can operate all aspects of the business, including hiring, firing, etc. So authority flows from the member in terms of other people's titles, and it is not necessary to specify lower level employee's title in the operating agreement. It is, however, necessary to specify the relationship of each owner in an LLC to the business if they will be transacting business on behalf of the company. This ensures that the veil between personal and company property remains intact.