Jun 162015

Separation of LLC and Personal Assets

(This is Part 4 of our LLC Series) It is important for any company to respect the differences between the company’s bank accounts, property, equipment, and other assets and the personal assets owned by the company’s owners. An LLC, like a corporation or other legal “person,” is a separate legal entity with assets that are owned by the LLC. Any attempt by an LLC member to dispose of or use LLC property would be no more proper than an attempt by that member to dispose of or use another member’s personal property. Members must respect the fact that the LLC’s assets are the property of the LLC, not the members. Similarly, an LLC member should not intermingle such member’s personal assets with the company assets of the LLC.

The Company’s books, records, and financial statements should be maintained clearly to reflect the separation of the Company’s assets from the personal assets of the members. The Company must conduct business in its own name (not in the individual name of any manager or member).  All letterhead, business card, bills, checks, invoices, and other Company forms should show the Company’s full legal name (and fictitious business name, if any), and the Company’s current address, telephone number, and fax number.

As a statement of sound business practice the observations made about separation of personal assets from company assets are fairly obvious. There is an additional, less obvious reason to follow those rules.

The creation of an LLC shield from liability for LLC owners inevitably gives rise to attempts to pierce that shield by the company’s creditors. This has long been the case with respect to the liability shield of corporations. As long as there have been corporations, there have been attempts to “pierce the corporate veil.”  Published cases in which such attempts have been successful usually involve a recitation by the court of a dozen or so factors in support of the court’s ruling that the shareholders of the corporation should be held personally liable for the debts, obligations, or other liabilities of the corporation.  At the top of this list of factors are (i) failure by the shareholders to respect the corporation’s separate identity (by intermingling corporate and personal assets) and (ii) some other form of misconduct by the shareholders with respect to the corporation.

Although the LLC entity form has been generally accepted and widely used in the United States since the mid-1990’s, there is still little case law specifically addressing the relevant issues in this area.  Nonetheless, it should be pointed out that at least two specific statutory factors favor LLCs over corporations in this area.

First, the law expressly states that LLC members are not liable for LLC debts, obligations, and liabilities merely by virtue of being a member in the LLC. There is no such explicit statutory enunciation of the shield from liability for shareholders in corporations (instead, the corporate shield is based on many years of case law and common law corporate principles). Second, one of the many factors often listed in piercing-the-veil cases for corporations is that the share-holders did not respect corporate formalities specified in the relevant corporation’s statute, bylaws and other charter documents. With regard to LLCs the law makes it clear that the LLC need not respect corporate formalities. Failure of an LLC to respect corporate formalities cannot be considered a factor “tending to establish that the members have personal liability” for any LLC debt, obligation, or liability.

This is not to say that LLC members can ignore the many years of corporations law developments in this area.  The few California LLC piercing-the-veil cases decided to date have generally applied principles from cases involving corporate laws.  The emerging trend appears to be to treat LLC piercing-the-veil cases as a close relative to corporate piercing-the-veil cases and generally apply similar criteria in LLC cases.   Underlying most cases is a notion of unfair treatment, deception or fraud, so it is most important that LLC members and managers consistently conduct business on behalf of the LLC with a clear and unambiguous indication that the LLC is the entity involved, and not individual members or managers.

The information provided herein is not intended as legal advice and should not be acted upon. If you have additional questions about this subject matter or would like to consult with an attorney about this or related subject matters, please call or email Josef Cowan at the Cowan Law Group (949) 333-0919 or at jcowan@cowanlawgroup.com.

Filed by Joe Cowan, June 16, 2015