Are your personal assets safe? Will your LLC hold up in the face of a legal challenge? Lawsuits to pierce the protective veil are issues LLCs face with an alarming increase in litigation. Your LLC was likely set up to protect you personally from exposure to unwanted and unnecessary liability. When was the last time you inspected your LLC?
LLCs Are New; So Are Attacks
According to our research, the very first LLC was formed in 1977 in Wyoming. It was a new concept and most other states did not follow with statutes allowing LLCs until the 1990s. Oklahoma enacted its LLC statutes effective September 1, 1992. The Oklahoma Statutes, like the majority of states, gives limited liability to members (sometimes thought of as “owners” or “shareholders” in a broader sense) against business risks.
If you have read much about LLCs, then you know the term is an abbreviation for Limited Liability Company. It’s not a complete absence of any responsibility for your actions. However, the Oklahoma legislature recognized the importance of keeping up with the new trend that was beginning to spread across the U.S.
Legal Research Shows LLC Challenges Are On The Rise
We subscribe to a legal research service called LexisNexis Advance. LexisNexis provides computerized legal research online to lawyers in exchange for a monthly subscription fee. You may have heard of Westlaw, a prime competitor of LexisNexis.
Curious as to how many cases would pull up, we entered “pierce LLC veil” as a search term. We already knew just from attorney talk and chatter over coffee that the number of lawsuits being filed to challenge the legal status of LLCs was increasing. Our perception that there was an increase in litigation trying to pierce past the LLC veil was validated with our search.
Cases to pierce the LLC veil cases are lawsuits directly attacking the LLC status in order to get
to personal assets.
The results from the phrase “pierce LLC veil” showed 38,393 cases across the U.S. There were 24,421 decisions in the Federal courts and 13,972 cases in the State courts that pulled up from the simple phrase “pierce LLC veil”. Now, the number of cases is only an indication. It is not a complete and exhaustive legal analysis of all of these decisions. Said a different way, we didn’t read all 38,393 cases.
However, to help show the significance of search results, you need to understand what LexisNexis provides to you. The legal research is pretty much limited to court cases with published decisions. So for example, in Oklahoma, the majority of lawsuits do not go up on appeal. The vast majority of district courts (first court level) render decisions that are not published. Therefore, a lot of district court decisions never make the law books, so to speak.
You can extract from the data that there are many more lawsuits filed to set aside an LLC to get to the personal assets of the members than just those published.
Nearly 40,000 Cases Since Mid-1990s
When you stop to think that most states didn’t authorize LLCs until the mid-1990s, there has been extensive litigation since that time. Nearly 40,000 cases reflecting the search term tells us that attorneys are looking more and more to pierce the LLC to go after your personal assets.
As an attorney, this makes sense. You follow the money! Chasing a bankrupt LLC for money isn’t nearly as appealing as going directly at the bank account of the owner who has been getting the profits of the company.
Educate Yourself – Prepare
Seeing what appears to us to be a trend in this type of litigation, we’ve set about to educate businesses and LLCs. The time to test, evaluate, and prepare your LLC for a legal attack is before a lawsuit is filed.
You don’t wait until someone sues to get prepared. If you delay, then your chances of fending off the lawsuit go way down. Why? Because if you aren’t operating your LLC in accordance with the rules, then the courts are inclined to say it’s not a real LLC.
For some, this is confusing. In fact, you may point to your LLC certificate and the receipts for paying the Secretary of State each year. You may say, “See! Here’s the paper that’s my proof! The Judge will see that my LLC is valid!” Sorry to burst your bubble!
If you believe an LLC amounts to a few pieces of paper, then you really need to consult with a competent attorney for some legal advice. Your LLC is a business entity, not a file folder of papers in your desk drawer. To be fair, this is a difficult concept at first. But, you can learn if you want to spend the time.
LLC Check-Ups Are Fast, Easy
We see businesses that lack time and want a shortcut to the answers. In order to help satisfy this need, we designed our LLC Check-Ups. These check-ups are intended as mini audits of your LLC for possible weaknesses in your proverbial armor. With flat fee pricing, you know up front the exact amount you’ll spend. We offer a few different plans depending upon the size of your budget and the extent of review you want to have performed.
For larger, more complex LLCs, we can tailor a custom plan to fit any special requirements. LLCs in this category usually aren’t large enough for a full-time in house attorney, but these companies have significant enough operations to justify a custom plan specific to their business.
Does Your LLC Need Attention?
If you haven’t spent any time and energy in the last few months giving your LLC the love, care, and attention that proper maintenance demands, you should! Your LLC is like a fire extinguisher. If you don’t keep it charged, maintained, and ready to go, then it’s not going to do you any good when the fire breaks out.