Piercing the Corporate Veil: Understanding the Limits of LLC Protection
Understanding definition of an llc can help business owners to stay immune to the creditors but the protection by LLC can disappear if business owners do not follow certain important rules. Here is what you need to know that how and when the LLC protection can be breached and what it can bring for you,
The first and foremost benefit that business owners have while forming a limited liability corporation LLC is their protection from business debts. This protection can go away easily if owners of LLC do not separate personal finances from those of the LLC. You simply cannot expect LLC to protect you from business dents if you are not following certain strategies and rules efficiently. Piercing the corporate veil means making your LLC vulnerable to third parties, a business or an individual that can easily come after your personal assets.
There are two important scenarios where the possibility of someone piercing into your corporate veil is high,
1-Lack of Real Separation Between the LLC and Yourself
When you are thinking of establishing an LLC it is important to deal with it like a real business. If you find yourself in following situations then chances are your LLC and your personal assets are in trouble,
- When you use the bank account of LLC to pay your personal bills.
- When you fuel your personal bank account with the depositing checks from LLC.
- When you cannot properly manage the minutes and business records of your LLC.
- When there are no bylaws existing for your LLC.
- Insufficient balance for creating a successful LLC.
In order to save yourself from the trouble of going bankrupt or letting someone breach your corporate veil it is important to keep a clear separation between LLC and your personal finances.
2-Fraud or Wrongful Actions
Any wrong act at your end under the name of your LLC can lend you in serious trouble. That can lead someone to jeopardize your corporate veil. Here are some actions that you need to do in order to stay immune to the intruders,
- Get rid of those loans that you think you won’t be able to pay.
- Stop defrauding people or businesses who are directly and indirectly engaged with your LLC.
- Stop breaking the law.
When you commit fraud or engage yourself in wrongful actions chances are the court will have the authority to hold you accountable for your actions.
How Courts View LLCs and True Separation
The corporate veil is pierced in a court making a determination that it should be.
When the Court states that there is hardly any distinction between members and the LLC itself which leads to some kind of fraud that has happened. in that case the court mainly requires there to have been a serious misconduct
When a court makes such kind of determination then it allows creditors to analyze the personal bank accounts, investments, home and other assets of members of LLC. Each asset owned by any member of LLC is under suspicion and the court can pay off any judgment that is entered against the LLC.
When Personal Creditors Come After our Business
There may come a situation where the creditors can access your LLC assets to satisfy your personal debts. When an individual is in personal debts and he owes that money to the LLC that he owns then the creditors can access the ownership interests of that individual in the LLC.
Here are some situations where this can actually happen,
- The court can order the LLC of that individual to pay off the money to the creditor from the accounts of LLC.
- The ownership of members of LLC is foreclosed.
- The court can also order the LLC to be dissolved.
Like any other business LLC also comes with advantages and disadvantages to the LLC owners. Although, LLC protects its members from personal liability but when an individual fails to maintain a clear separation between his/her personal assets and the financial assets of LLC then chances are he or she may face legal issues. There is only one simple rule to avoid any piercing of the corporate veil: always act in accordance with the law.