Piercing the LLC Veil
Can You Be Held Liable for Your Company’s Actions?
Concerned About Personal Legal Liability as a Member of an NJ LLC?
If you need help in this complex, highly fact-sensitive area of the law, call Fredrick P. Niemann, Esq. directly at toll-free (732) 863-9900 or e-mail him at fniemann@hnlawfirm.com to set up a phone or in-person consultation. We’re here for you.
Introduction to Piercing the Corporate Veil
While LLC Members are not personally liable for the company’s debts, New Jersey law has recognized the remedy of “Piercing a Company Veil”. “Piercing” is a process that involves proving a claim against the company’s owners/members to hold them personally liable for economic damages. To pierce the company veil, 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 officers, personnel,” or if members from affiliates operate within an LLC without failing to distinguish between the entities. Courts will also consider whether the company fails to observe certain formalities expected of a bona fide business entity (i.e., member annual meetings, independent accounting system(s), defined organizational chain of command, is solvent, lacks business records) or is merely a façade for an individual’s or parent company’s operations. Overall, the Court considers whether the company is a legitimate business or whether the owners are simply seeking to hide behind the LLC’s shield.
When Can You Be Held Personally Liable Doing Business as a Member of an LLC?
In an unreported decision handed down by the Appellate Division of Superior Court (Brown Hill Morgan v. Lehrer), the Court 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 doctrine’s principles should not be fully applicable to a limited liability company…”
If such a veil-piercing claim is made, the parties seeking to pierce the company veil have the burden of establishing that the company’s form of organization should be disregarded. Careful study of the doctrine relating to piercing a corporate veil indicates that experts who have commented on this subject have rendered the opinion that the cases are inconsistent, and quite often the outcome of the case will depend upon the trial judge’s sense of fairness.
While the law on piercing a company veil remains ambiguous, certain rules can be applied to help mitigate concerns for those operating an LLC and protect their personal assets from legal liability. This is often the sole reason members choose to form an LLC.
The whole idea behind protecting your personal assets is keeping the business separate from your personal life. This involves paying close attention to the LLC’s structure, operations, and titles, including job positions. Documents (i.e., checking accounts, business cards, letterhead, designations on contracts) should be carefully written and identified as LLC. Most importantly, NEVER NEVER NEVER co-mingle funds between your personal and business accounts. Additionally, always operate the company in a way that distinguishes it from your personal life. Separate identities should always be acknowledged and respected. For example, never pay an LLC debt with your personal account or with another business account. This behavior could make you and other members liable for paying off the LLC’s debts. Careful attention should be paid to the operating agreement, which governs the LLC. Required meetings (if so provided for in the operating agreement) should be held. Minutes should be maintained. Files should be “papered” and attention paid to details related to maintaining separate identities.
Fredrick P. Niemann Esq.
Generally, the purpose of an operating agreement for an LLC is to avoid individual liability for the business’s debts 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 govern the LLC carefully to maintain personal immunity.
For questions about a NJ LLC matter, please contact Fredrick P. Niemann, Esq. today. He can be reached at (732) 863-9900 or email him at fniemann@hnlawfirm.com.
Written by Fredrick P. Niemann, Esq. of Hanlon Niemann & Wright, a New Jersey LLC Law Attorney