ALP: If I set up an LLC...can someone still get my personal assets?

July 4, 2008

Yes. It is still possible for someone to get to your personal assets if the LLC is not properly managed and operated.

Fraud normally allows someone to “pierce the veil of the LLC.” Additionally, it is necessary for the LLC to have assets that are substantial enough to convince a judge that the LLC is truly a functioning business.

A recent judicial decision allowed a claimant to pierce the veil where a realtor was using corporate form to conduct transactions involving hundreds of thousands of dollars. However, the sole asset of the business was a checking account with a balance of $150.

It also is necessary to have separate business and financial records to avoid getting pierced. The LLC must have a separate bank account, separate checking, financial statements, agreements, leases and other records which are distinct from the owner’s personal records. Comingling personal records and funds with LLC records and funds creates a clear path to having the veil pierced.

Another recent decision demonstrated facts that showed that the company had no assets which were separate and distinct from the individual’s assets. That resulted in a judgment against the individual owner in excess of $300,000.

Finally, be sure all corporate activities are well documented. If meetings are held, keep minutes. Simple observations of corporate formalities will provide a great deal of protection. But failure to do so may not just create an opportunity to pierce the veil, but may go all the way and open the Kimono.

Tom Anthony (Member/Cincinnati) is Vice Chair of the Business and Corporate Department at Frost Brown Todd. His law practice focuses on healthcare, corporate transactions, general business, regulatory, and joint ventures. Tom is listed in The Best Lawyers in America® for Healthcare Law and is AV Rated by Martindale-Hubbell®.