Veil piercing for LLCs
In this post I discuss an issue that frequently comes up when an LLC is the defendant in a lawsuit: If I’m the plaintiff, can I “pierce the veil” to reach beyond the defendant LLC to the members of the LLC (and conversely, if I’m the member of an LLC that has been sued, can I be confident that the liability is stuck at the LLC level?). This matters if the LLC cannot pay the judgment. And, since LLCs are the most common form of business entity in Tennessee, it comes up a lot.
The LLC veil can generally be pierced for the same reasons as the veil of a Tennessee corporation can be pierced, with an important exception. One of the factors leading to veil piercing of a corporation is the failure to follow corporate formalities (such as having meetings, issuing stock certificates, etc.). That is not true for an LLC. This difference is in the LLC statute and was approved by the Tennessee Court of Appeals in the 2006 Canter case. So, this alone is a reason why someone forming a business might elect an LLC as opposed to a corporation—less risk of personal liability in the LLC. Many LLCs and corporations fail to follow formalities (they fail to have meetings, have votes, approve transactions per the bylaws, etc.). This is not good practice, but if it is going to occur, better to occur in an LLC than a corporation.
photo credit: Søren Niedziella via flickr cc