Presented by Ryan M. Lower of the Morris Law Group
History of LLCs The LLC form came from demand for an business organization that gives owners limited liability without the double tax that t applies to corporations. In 1977, Wyoming passed the first LLC act. After the IRS confirmed that LLCs would be treated like partnerships for federal tax purposes the remaining states t adopted d various LLC statutes. t t
Defining LLCs Unincorporated entity Formed through h a filing with the state t under LLC statute Members and managers are not liable for the entity s obligations Relationship of members, managers, and the entity is defined by agreement and default statutory t t rules
Limited Liability No member of the LLC is liable for the LLC s obligations solely based on being a member or manager. Generally, members and managers are liable based on breaches of their own duty of care or contractual obligations.
Except as otherwise provided in subsection (c) (providing for liability by consent or by provision in the articles), the debts, obligations, and liabilities of limited liability company, whether arising in contract, tort, or otherwise, are solely the debts, obligations, and liabilities of the company. A member or manager is not personally liable for a debt, obligation, or liability of the company solely by reason of being or acting as a member or manager. ULLCA ' 303(a)
Example of limited liability under statute Nevada law states that "[u]nless otherwise provided in the articles of organization or an agreement signed by the member or manager to be charged, no member or manager of any limited- liability company formed under the laws of this State is individually liable for the debts or liabilities of the company." Nev. Rev. Stat. 86.371.
Member not a proper party to a lawsuit against the LLC A member of a limited-liability liability company is not a proper party to proceedings by or against the company...." Nev. Rev. Stat. 86.381.
Debts, obligations, and liability belong solely to company Many courts have relied on this type of language to deny veil-piercing claims. See Larry E. Ribstein & Robert R. Keatinge, 1 Ribstein and Keatinge on Limited Liability Company, 12:2 (2d ed. 2015) (collecting cases).
Member Liable to LLC Members are liable to the LLC for failure to make contributions required under the operating agreement.
A member is liable to the LLC: (a) For a difference between the member s contributions to capital as actually made and as stated in the articles of organization or operating agreement as having been made; and (b) For any unpaid contribution to capital which h the member agreed in the articles of organization or operating agreement to make in the future at the time and on the conditions stated in the articles of organization or operating agreement. Nev. Rev. Stat. 86.391(1).
Charging Order Judgment creditor of a member may charge the member s interest with payment of the unsatisfied amount of the judgment with interest. Nev. Rev. Stat. 86.401(1). This means judgment creditor can execute on any distributions made to the member.
Limits of a Charging Order Nevada law provides that: A charging order is the creditor s exclusive remedy against member s LLC Interest. Judgment creditor of member may not foreclose on membership interest in the LLC. Nev. Rev. Stat. 86.401(2)
Piercing the Corporate Veil The common law has long recognized the equitable remedy of piercing the corporate veil when a corporation acts as the alter ego of the controlling individual. Many states added the alter ego doctrine to their corporation statutes. See, e.g., Nev. Rev. Stat. 78.747(1).
Requirements for Piercing the Corporate Veil: the corporation must be influenced by the person asserted to be the alter ego; there must be a unity of interest that one is inseparable from the other; and adherence to the corporate fiction of a separate entity would sanction fraud or promote injustice. Polaris Indus. Corp. v. Kaplan, 747 P.2d 884, 886 (Nev. 1987).
Question Does the Alter Ego Doctrine Apply to Does the Alter Ego Doctrine Apply to Limited Liability Companies?
Answer Yes, under statute or case law. Maybe?
Alter Ego Doctrine Applicable to LLCs under State Statute Cal. Corp. Code 17703.04(b) 04(b) ( A member of a limited liability company shall be subject to liability under the common law governing alter ego liability ). y) Other states with similar statutes: Colorado, Minnesota, North Dakota, Texas, Washington, and Wisconsin
Alter Ego Doctrine Applicable to LLCs under Case Law Courts in many states have held that veil Courts in many states have held that veil piercing applies to LLCs
Arguments against applying alter ego to LLCs LLCs are different from corporations per statute. LLCs receive little funding from members so inadequate capitalization arguments fail. LLCs are less formal than corporations so a failure to observe formalities is hard to show. Very fact intensive.
Nevada undecided Bankruptcy court predicted that Nevada would apply the apply ego doctrine to LLCs. In re Giampietro,, 317 B.R. 841, 846 (D. Nev. 2004). It is for the legislature, not the courts, to rewrite Nevada's LLC statute. Holiday Ret. Corp. v. State, DIR,, 274 P.3d 759, 761 ( Nev. 2012) ("It is the prerogative of the Legislature, not this court, to change or rewrite a statute.")