Limited liability companies: liability

Question 1

Piercing the corporate veil

Answer 1

LLC members generally are not personally liable for an LLC’s obligations.

But a court may pierce the veil if there are equitable grounds to do so, for example:

• Undercapitalization of the business;
• Commingling of assets;
• Confusion of business affairs; or
• Deception of creditors.

Although less relevant in the LLC context, some courts will cite a failure to follow formalities in the LLC context as part of the rationale for piercing the LLC veil as well.

Question 2

Piercing the corporate veil: mere instrumentality test

Answer 2

To seek piercing under the mere instrumentality test, the plaintiff must show that:

(1) The members dominated the entity in such a way that the LLC had no will of its own;
(2) The members used that domination to commit a fraud or wrong; and
(3) The control and wrongful action proximately caused the injury.

Question 3

Piercing the corporate veil: unity of interest and ownership test

Answer 3

Under the unity of interest and ownership test, a plaintiff seeking veil piercing must show that:

(1) There was a unity of interest and ownership between the entity (the LLC) and its members;
(2) The LLC did not have an existence independent of its members; and
(3) Failure to pierce the veil through to the members would be unjust and inequitable.

Question 4

Dissolution: notice to creditors

Answer 4

Members of an LLC must:

(1) account for its liabilities upon liquidation; and
(2) Notify and pay creditors.

Question 5

Duty of loyalty

Answer 5

Members must:

(1) Account to the LLC for any profit or benefit;
(2) Refrain from dealing with the LLC on behalf of an adverse interest; and
(3) Refrain from competing with the LLC.

Question 6

Duty of care

Answer 6

Members must act reasonably, although their actions are subject to the business judgment rule.

Question 7

Direct and derivative actions

Answer 7

Members may bring direct actions against the LLC or other members to enforce their own rights.

Members may also bring derivative actions on behalf of the LLC against other members—or even against themselves.

Question 8

Torts committed by members

Answer 8

If a member renders professional services in an LLC, the member, as well as the LLC, may be liable for torts committed while rendering such services.