Can Your LLC Be Pierced By A Creditor?

Hello Friends and Colleagues!

So many business owners take steps to address housekeeping issues during the summer because there may finally be enough time to focus on “protection” verses “production” before things ramp up for the season and approaching Holidays.
Housekeeping would include making sure your business entity binder is being maintained and up to date.  Your business or investment LLC is in place to protect you and your business; however, often an LLC is vulnerable to be pierced by a creditor?
Understand that “piercing the veil” means to disregard the entity as a legitimate business entity and thereby a creditor could gain access to the owner’s personal assets…so this is very important.
A few common pitfalls where an LLC may become vulnerable to piercing the veil are:

1.  Failure to maintain adequate business records…

Do you keep an LLC Binder with relevant business records in it?  What are relevant business records you might ask?  Generally, you need your annual meeting minutes included in your LLC Binder.  Minutes from your annual should include a summary of business conducted at your annual meeting…this would reference any changes agreed upon by the board of managers throughout the year, major expenditures for assets or personal having been approved, business strategy analysis or changes, etc.  Other records may include resolutions of the managers concerning major decisions or records of the assignment of membership interests to new members…again the list could go on.  The important point is that there is a paper trail in place to support the legitimacy of the independent business entity (apart from the individual owner/s) because a creditor would seek to discredit the legitimacy of the entity if seeking to pierce the veil.

2.  Commingling of personal and business assets…

This issue often is the product of disorganization as much as one of malice…in other words this may not be intentional but owners often times pay personal expenses from the business checkbook or pull out cash for personal reasons.  Other concerns may be using business assets for personal reasons or otherwise treating the business entity as an “alter ego” of  the owner.  In seeking to pierce the veil, a creditor will content that the business entity was not legitimate because it was simply an “alter ego” of the owner/s.  They way to prevent this, in general, is of course to treat business and personal matters separately and document all personal debits from the business as distributions.

3.  Signing business documents in personal name…

How documents are signed, especially contracts, is extremely important and often overlooked.  Generally, business agreements should be signed under the Company Name (LLC name) as Manager.   If a business owner consistently signs personally, a creditor could utilize this fact to again argue that the LLC was simply an “alter ego” for the owner.

So friends, we’ve covered a few of the big pitfalls.  Just know that there are many areas of concern when maintaining your business entity and that competent legal advice is needed to address the specific circumstances of your business and assets.

I hope this was valuable…until next time:-)

SJG

Steven Gibbs, Managing Attorney

 

Gibbs Law Office, PLLC

8695 College Parkway, Suite 2012,

Fort Myers, FL  33919

Phone:  (239) 415-7495

Fax: (239) 243-9029

Email: info@gibbslawfl.com

 

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