Courts Can Pierce the Corporate Veil to Make LLC Members Pay, but Only in Extreme Cases
Most successful entrepreneurs have a series of failed business ventures in their past; trial and error are an essential part of the entrepreneurship process, and sometimes the process requires you to close an existing business entity and start over with a new one. If you are new to entrepreneurship, you might be surprised that someone who has lost hundreds of thousands, or even millions, of dollars on multiple occasions can afford to treat you to a steak dinner while regaling you with tales of their entrepreneurship battle scars, or even be approved for the credit card. The limited liability company (LLC) business structure is one of the best ways that businesspeople can protect their personal assets and credit from being damaged by debts owed by the business or by court judgments against it. Under extenuating circumstances, courts can override the immunity afforded to LLC members and hold them liable for the LLC’s obligations. If you are an LLC member or are considering forming an LLC, a Maryland business law attorney can answer your questions about the limits of limited liability.
What Is Piercing the Corporate Veil, and When Does It Happen?
The “corporate veil” is a concept by which the law treats businesses as legal entities separate from their owners, partners, and members. The defining characteristic of the LLC business entity is that it protects the members of the LLC from liability for the LLC’s debts and from judgments against it; thus, the corporate veil works to the advantage of LLC members even more than it does to partners in other types of businesses, although most business structures benefit from the corporate veil to some extent. Piercing the corporate veil is when a court makes an exception to this legal separation of business and entrepreneur and orders the business owner to pay a financial obligation belonging to the business. Courts only do this when the financial obligation is the result of serious misconduct on the part of the member ordered to pay it.
A Case of Piercing the Corporate Veil in Maryland
In 2009, a dispute began between Maryland real estate developer Ronald Cohen and Tower Oaks Boulevard, LLC, the company that owned a building where Cohen rented office space. In a 2011 lawsuit, Tower Oaks alleged that Cohen’s refusal to pay rent was a major factor leading to Tower Oaks’ declaration of bankruptcy. The trial court required Cohen to pay punitive damages and ordered that his interest in several LLCs be liquidated; it reasoned that Cohen’s misconduct was egregious enough to warrant this ruling. An appeals court later overturned these rulings, based in part on Cohen’s defense that Tower Oaks was already in default before he incurred his debts to it.
Contact Us Today for Help
A business law attorney can help you understand the legal and financial protections offered to you by an LLC, as well as the exceptions to them. Contact the Washington DC small business law attorneys at Tobin, O’Connor & Ewing or call 202-362-5900.