LLC’s: Piercing the Limited Liability Company Veil – Members Beware

HNWBusiness and Corporate Legal Services, Business Law, Partnership Rights Litigation

By: Christopher J. Hanlon, Esq.

New Jersey law has recognized the remedy of “Piercing a Corporate Veil” for almost as long as the corporation has existed. Normally individuals or parent corporations that own a corporation are not responsible for the corporation’s debts. “Piercing” is the process of proving a claim related to a corporation’s debt which the corporation owners will be responsible for. The general rule related to a piercing claim is that a court will look at various factors, “including whether or not the company is grossly undercapitalized, the day to day involvement of the company’s directors, officers and personnel,” or whether personnel from affiliates operate within an LLC without failing to distinguish between the corporate entities. Courts will also consider whether the company fails to observe corporate formalities, pays no dividends, is insolvent, lacks corporate records, or is merely a façade for an individual’s or parent company’s operations.

In a recent unreported decision handed down by the Appellate Division of the State of New Jersey, Brown Hill Morgan v. Lehrer, this Appellate Panel applied the doctrine of piercing the corporate veil to a limited liability company. The Court concluded “we can perceive no reason in logic or policy why the principles should not be fully applicable in the context of a limited liability company…”

If such a claim is made, the parties seeking to pierce the corporate veil have the burden of establishing that the corporate forum should be disregarded. A careful study of the New Jersey doctrine related to piercing the corporate veil indicates that experts on this subject matter have rendered the opinion that the cases are inconsistent, and quite often the result will depend upon the particular trial judge’s sense of fairness.

Despite this ambiguity in the law, certain rules can be relied upon to assist those who operate with an LLC in maintaining the protections afforded by that corporate structure (which is probably the sole if not the primary purpose of forming an LLC and operating under its structure in the first place).

Careful attention should be made to the corporate structure and to the positions held by the respective representatives of the LLC. Members and managing members should pay careful attention to the use of job titles (e.g., “member” or “managing member”). Documents (checking accounts, business cards, letterhead, designations on contracts) should be carefully attended to and used. If various properties are owned by various entities but managed by affiliated groups all involved personnel should pay careful attention to their respective titles, and most important, never never never comingle funds or fail to operate in a way that separate corporate identities are acknowledged and maintained. For example, one affiliate should never pay the financial obligation of another. That type of behavior could lead to the “well intended” LLC becoming responsible for the debts of the less solvent affiliate. Careful attention should be paid to the operating agreement which governs the LLC. Required meetings (perhaps annual – if so provided for in the operating agreement) should be conducted. Minutes should be maintained. Files should be “papered” and attention should be paid to details related to the maintenance of separate identities.

Generally the purpose of operating under an LLC is to avoid individual liability for the debts of the business properly operating within the confines of the LLC and to shield other assets. Maintaining that shield (or veil) requires more than just the initial formation and payment of the registration fee. One must operate carefully within the veil to maintain the veil.

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