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Piercing the LLC Veil

Piercing the LLC Veil.

It is now well established in most states that the veil piercing doctrine applies to limited liability companies.  See, e.g., Westmeyer v. Flynn, 889 N.E.2d 671, 676-77 (Ill. App. 1st Dist. 2008) (holding Delaware law applies doctrine of corporate veil piercing to limited liability companies).  In order to pierce the llc veil (under the corporate veil piercing doctrine), it must be shown that: (1)  There is such a unity of interest and ownership that the separate personalities of the corporation and the individual no longer exist, but the corporation is, instead, the alter ego of one or a few individuals; and (2)  If observed, the corporate form would sanction a fraud, promote injustice, or result in an inequity.

Significant factors in determining whether this test has been met include: (1) undercapitalization of a close corporation; (2) failure to observe corporate formalities; (3) siphoning of corporate funds by the dominant shareholder; (4) nonfunctioning of other officers or directors; and (5) the use of the corporation as a facade for operations of the dominant shareholder.  See, e.g., Ditty v. CheckRite, Ltd., Inc., 973 F. Supp. 1320, 1335-36 (D. Utah 1997).websm-Small-Business-Package

Some state statutes explicitly apply corporate veil piercing to limited liability companies.  See, e.g., C.R.S. § 7-80-107; Minn. Stat. Ann. § 322B.303.  Other statutes imply the doctrine may apply by stating that members do not lose limited liability merely by failing to comply with appropriate formalities.  ULLCA § 303(b).  However, most courts that have considered the issue apply the corporate veil piercing doctrine to LLCs, even in the absence of a statute.  Westmeyer v. Flynn, 889 N.E.2d 671, 676-77 (Ill. App. 1st Dist. 2008) (holding Delaware law applies doctrine of corporate veil piercing to limited liability companies). For more information on piercing the limited liability company veil, see Argyle’s Small Business Handbook.

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