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If the damages are substantial, then the creditor might attempt to “pierce the corporate veil” to remedy the damages. Piercing the corporate veil is a legal term derived with Corporations, but it has been applied to an LLC.
In order to pierce the corporate veil the creditor must usually show that (1) the LLC independent existence was non-existent and the members were in fact alter egos of the LLC; (2) the LLC was used fraudulently or for an improper purpose; and (3) the fraudulent or improper purpose use of the LLC caused injury to the creditor.
This is actually very difficult to do and courts are reluctant to pierce the corporate veil and make the members personally liable absent fraud or an improper purpose. One of the main things to get from reading cases and past disputes is that you must be respectful of the entity form. If you have an LLC and you are doing business as such, respecting the formalities of the LLC is of utter important and not treat the LLC as a mere sham.
As mentioned above, outside protection involves the LLC’s ability to protect itself from any wrongdoing by its members.
In Florida, the owners of an LLC are called Members. The LLC can either be a single-member LLC or a multi-member LLC. The Florida Revised Limited Liability Company Act (the “Act”) makes an important distinction between single-member LLC and multi-member LLC.
For multi-member LLC’s, the Act makes a charging order the sole and exclusive remedy for a creditor’s right against a member’s interest in an LLC. A charging order constitutes a lien upon the member’s transferable interest and requires the LLC to pay over the judgment creditor a distribution that would otherwise be paid to the member.
What does this mean? The charging order only allows the creditor to get distributions, losses, or creditors that the member was entitled. Therefore, if the LLC pays a distribution to the member, the creditor of the member would be entitled to that distribution, BUT the creditor will not be a part of the LLC or will be able to foreclose on the interest of the member.
The law protects the other members that were not involved in the wrongdoing and do not want an outside person who may not have any knowledge in the business to run the affairs of the company.
Compared to a multi-member LLC, a single-member LLC has far less protection in Florida. If the creditor can prove in court that the distribution under the charging order will not satisfy its judgment within a reasonable time, the court may allow the sale of the interest in the LLC in a foreclosure sale.
If the court is satisfied and orders a foreclosure sale, the purchaser becomes the new member of the LLC and you cease to be a member of the LLC.
I covered both inside and outside limilited liability protection. As you can see, limited liability is not absolute.
First thing to do is to talk to a business attorney and make sure that the house is in order. This means that you are running your LLC properly and have all the required documents required by state law.
Your LLC is a business entity and thus should be respected. Use the LLC for its proper business purpose and do not commingle your personal affairs with those of the LLC.
There are ways to make a single-member LLC into a multi-member LLC. Depending on the circumstances, adding a spouse or a separate company to become the second member is sometimes recommended. There are more ways to add a member to a single-member LLC but you should first consult a business attorney so he or she can analyze your particular facts and circumstances.
As always, this is not meant to be legal advice, but only for informational purposes. You should always consult to a licensed attorney for specific advice tailored to your situation, and this article does not create an attorney-client relationship.
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