From The KDDK Advantage
- October/November 2007
Piercing the Corporate
Veil: An LLC Owner Gone Wrong
by Alan Shovers
Limited Liability Companies (LLCs)
are popular business entities because they limit an individual’s
personal
responsibility for the debts and liabilities associated
with his or her business.
And while an LLC is meant to shield
business owners from personal liability, a recent Indiana
LLC case illustrates that abusing an LLC for the purpose
of
bilking your creditors is not a good idea.
In Four Seasons Manufacturing, Inc.
v. 1001 Coliseum, LLC, the court found that a landlord
had the right to collect outstanding rent payments from
an
LLC owner even though the owner wouldn’t normally be held liable for these
payments. In this case the landlord was successful at “piercing the LLC
veil” because of the owner’s dishonest activities.
It seems the LLC business owner tried
to escape outstanding rent payments by creating a second
LLC with a similar name, phone number, and employee
records.
With this new “look alike” LLC set in place, the LLC owner transferred
all of the valuable assets of the original LLC to the second LLC, but
neglected to transfer the debt to the newly created LLC.
His intent was to render the original
LLC insolvent and in doing so, free his business from
the obligation of making rent payments. But when
the
look-alike LLC was discovered, the landlord took the LLC owner to court.
The court stated that Indiana courts
are reluctant to disregard a corporate or LLC identity
shield that protects owners from personal liability.
But the court went on to say that even though the second LLC met
the required
standards
for liability protection, the LLC owner in this case would be held
personally liable for paying because creditors have the right to
be protected from
fraud or injustice.
The moral of this LLC story: maintain
good records and business practices and do not expect
to get out of financial obligations by manipulating
an LLC, no
matter how cleverly it is done.
Alan
Shovers has extensive experience
in business and transactional law, tax, real estate,
health care and education law, labor & employment law and
estate planning & administration. Contact him at ashovers@kddk.com or 812-423-3183.
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