Single Member LLCs - Piercing the Corporate Veil
Single Member Limited Liability Companies (“LLC”s) can be a very important asset protection device and are now permitted in all fifty U.S. states. However, improper operations can lead to a lack of creditor protection. When planning with single-member LLCs it is particularly important to follow formal procedures so that the entity is not seen as an alter-ego of the LLC owner.
Some of the general formalities include:
• Separate bank account from the owner
• No comingling of funds
• Formal books and financial records
• Annual meeting with documentation
• Adequate capitalization
• Operating agreement in place even though there are no other members
• LLC membership interest certificate
• Transactions and contracts are between the LLC and the customer, vendor, lender, or other third parties rather than the owner of the LLC
Some common uses of single-member LLCs include small business operations, protecting valuable assets, multi-entity business enterprise, and the creation of firewalls. To obtain these objectives it is important that proper formalities are followed.
GREENHUNTER WIND ENERGY v. WESTERN ECOSYSTEMS TECHNOLOGIES, INC.
Greenhunter v. Western Ecosystems was a recent Wyoming case where a judgment creditor pierced the corporate veil. The case involved a contract for consulting services between Greenhunter Wind Energy (“Greenhunter”) and Western Ecosystems Technology, Inc. (‘Western”). Despite Western providing services to Greenhunter, Greenhunter never paid Western. Western brought a breach of contract lawsuit against Greenhunter and was awarded a judgment of $43,646 plus attorney fees of $2,161. However, when Western tried to collect it found out that there were no assets owned by Greenhunter to satisfy the judgment. Western then brought legal action against the sole owner of Greenhunter in an attempt to pierce the corporate veil and make the owner liable for the judgment.
The Court determined that although limited liability is the usual rule, that because Greenhunter was purposely undercapitalized and did not have sufficient funds to pay Western that it was simply an alter-ego of its owner. The Court also said that there were overlapping ownership and management, disregarded entity tax filing, and manipulation by the sole member to achieve rewards without risks. For these reasons, the Court allowed Western to bypass the LLC and reach the owner’s assets.
This case is also important because Wyoming has been known to have strong assets protection statutes and shows that courts may be willing to bypass the entity and reach the member under certain circumstances.
Some additional considerations to potentially help limit liability to the LLC include 1) different CPAs for the member and the LLC, 2) employ persons other than the owner to act on behalf of the LLC, and 3) have management other than the sole member of the LLC. In essence, the more the LLC acts as a separate entity the more likely the courts will consider it a separate entity.