Is your LLC protecting you?

By Nicholas Gerschutz, associate attorney, Barrett, Easterday, Cunningham & Eselgroth, LLP

Are you a member of a limited liability company? Were you attracted to the LLC because it gave you flexibility in running your business while limiting your personal liability in the event your company was sued? Many business owners set up LLCs for these reasons. However, LLCs have their limitations, and an LLC member may still be held personally liable if a plaintiff “pierces” the LLC’s limited liability structure.

“Piercing the corporate veil” occurs when a business owner, normally protected by statute from liability as a member of an LLC or shareholder of a corporation, is found liable due to the owner’s illegal actions. In Ohio, courts refer to three elements that must be met to “pierce the veil” of an entity’s protection, as reasoned in a 1993 Ohio Supreme Court decision in Belvedere Condominium Unit Owners’ Assn. v. R.E. Roark Cos. Inc.

The first prong is often called the “alter ego” doctrine, and the Court must find the “corporation has no separate mind, will, or existence of its own.” The second prong requires the LLC member to commit fraud or an illegal act against the plaintiff, and the third prong requires injury or loss to result from the control and wrongdoing.

The easiest way to prevent being held personally liable is to make sure your LLC cannot be seen as an alter ego of yourself. What does this mean, and how can you make this happen? Courts look to several factors to determine whether an LLC acts as an alter ego for its members. LLC members should keep the following tips in mind:

  1. The LLC’s bank account must be separate from your personal bank account;
  2. Do not pay your personal expenses from your LLC’s bank account;
  3. Keep accurate records of LLC business;
  4. Hold LLC meetings and keep minutes (document major decisions made), even if the meetings are not formal;
  5. Do not use LLC property (for example, vehicles) for personal use without keeping records distinguishing business from personal use.

It can be easy, especially for sole members, to ignore these LLC formalities, and lots of members do not follow them. However, by failing to do so, they put themselves at risk of personal liability.

In Denny v. Breawick, a recent Ohio Court of Appeals case, the Court found a building contractor, the sole member of two LLCs, personally liable for violation of construction laws. In that case, the Court found the LLCs were alter egos because the building contractor was the sole member of the LLCs, he drew funds from the LLC bank account to pay personal expenses, one of the LLCs did not have a separate bank account, the member kept no corporate records, and no meeting minutes could be identified.

To make sure you do not end up like the contractor in Denny, follow the tips above to ensure your LLC is not simply an alter ego. And don’t forget to talk with your insurance agent about adequate insurance. Contact us if you have any questions or concerns regarding your personal liability.

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