Protecting the Limited Liability of an LLC Member

Piercing the LLC Veil

Can You Be Held Liable for Your Company’s Actions?

Concerned About Personal Liability?

If you need help in this complex, highly fact-sensitive area of the law, call Fredrick P. Niemann, Esq. directly at toll-free (855) 376-5291 or e-mail him at fniemann@hnlawfirm.com to set up a phone or in person consultation.

We’re here for you.

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 which involves proving a claim against the company’s owners/members to hold them personally liable. 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, is insolvent, lacks business records, or is merely a façade for an individual’s or parent company’s operations. Overall, the Court looks to see whether the company is a legitimate business or if the owners are simply seeking to hide behind the shield of the LLC.

When Can You Be Held Personally Liable Doing Business as a Member of a LLC?

In an unreported decision handed down by the Appellate Division of the State of New Jersey (Brown Hill Morgan v. Lehrer), an Appel 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 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 company veil have the burden of establishing that the company form should be disregarded. Careful study of the New Jersey doctrine related to piercing a 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.

While the law on piercing the company veil remains ambiguous, certain rules can be followed to help assure those operating an LLC that protection of their personal assets will be honored. This is often the sole reason members choose to form an LLC in the first place.

The whole idea behind protecting your personal assets is keeping the business separate from your personal life. This involves paying close attention to the structure and positions held by members of the LLC, including job titles. Documents (checking accounts, business cards, letterhead, designations on contracts) should be carefully written and identified as LLC. Most importantly, NEVER NEVER NEVER comingle 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 lead you or the other members becoming liable for LLC debts being paid off. 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.

Fredrick P. Niemann Esq.

Generally, the purpose of an operating agreement under an LLC is to avoid individual liability for the debts of the business 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 to maintain the personal immunity.

For questions about a NJ LLC matter, please contact Fredrick P. Niemann, Esq. today. He can be reached at toll-free (855) 376-5291 or email him at fniemann@hnlawfirm.com.

 

 

Written by Fredrick P. Niemann, Esq. of Hanlon Niemann & Wright, a New Jersey LLC Law Attorney