September 5, 2017
Our firm has previously written on the creative ways one can shield his or her personal assets through the corporate or limited liability structure. As noted in that entry (Link Here), “Ohio courts and courts throughout the nation have been pretty vigilant in protecting the corporate veil of owners of corporations and limited liability companies.” However, this general principle is not without a couple of narrowly drawn exceptions, explored below.
Formation of LLCs
The Finney Law Firm deals regularly with clients and other parties that are organized as limited liability companies (“LLCs”) or corporations. After all, these entities are fairly simple to create – one must simply fill out an online form or two, submit a relatively small fee to the Secretary of State, and they are then able to transact business without fear of personal liability, right? Maybe not.
The powerful “corporate veil” protection of an LLC
Generally, an LLC member cannot be held personally liable for the torts or contractual obligations of the LLC solely by virtue of his or her membership in the LLC. City of Lakewood v. Ramirez, 2014-Ohio-1075, ¶ 11 (8th Dist. 2014). Thus, if an LLC defaults on its obligations under a contract, an adverse party cannot obtain judgment against the LLC members’ or managers’ personal assets. It is for this reason, along with its ease of formation, that the LLC structure is so desirable to many. And, most of the time, it succeeds in its purpose of precluding judgment against the members’ personal assets.
However, there are two sets of circumstances under which the limited liability structure does not shield members from personal liability.
1. Piercing the corporate veil
The first is where the court deems it proper to “pierce the corporate veil,” thereby removing that protection of limited liability.
[I]n order to pierce the corporate veil and impose personal liability upon [members or managers], the person seeking to pierce the corporate veil must show that: (1) those to be held liable hold such complete control over the corporation that the corporation has no separate mind, will, or existence of its own; (2) those to be held liable exercise control over the corporation in such a manner as to commit fraud or an illegal act against the person seeking to disregard the corporate entity; and (3) injury or unjust loss resulted to the plaintiff from such control and wrong.
Stewart v. R.A. Eberts Co., 2009-Ohio-4418, ¶ 16 (4th Dist. 2009), citing Belvedere Condominium Unit Owners’ Ass’n v. R.E. Roark Cos., 67 Ohio St. 3d 274, ¶ 3 of the syllabus, 617 N.E.2d 1075 (1993). The idea behind piercing the corporate veil is that there is so little separation between the individual and the LLC, that they can almost be considered “alter-egos” such that it is not unreasonable to hold the member or manager of the LLC personally liable for the debts, obligations, and/or liabilities of the LLC.
2. Member’s own acts, ommisions or fraud
The second instance where a member can be held personally liable notwithstanding the limited liability structure is where the members’ own acts or omissions constitute fraud. R.C. 1705.48; See also Deitrick v. Am. Mortg. Solutions, Inc., 2007-Ohio-839, ¶ 19 (10th Dist. 2007) (finding that a “corporate officer can be individually liable in tort if the promises contained in the contract are fraudulent” and “even if he commits the fraud while in the course of his corporate duties”); Stewart, at ¶ 30 (“[N]either the corporate shield, nor a shield of limited liability insulates a wrongdoer from liability for his or her own tortious acts.”). Additionally, this second instance is not contingent upon the first (i.e., a litigant who seeks to hold an LLC member personally liable for the member’s own fraud need not first pierce the corporate veil in order to do so). Yo-Can, Inc. v. Yogurt Exch., 149 Ohio App. 3d 513, 527 (7th Dist. 2002) (“[P]laintiffs need not pierce the corporate veil to hold individuals liable who allegedly personally commit fraud.”).
Thus, while the LLC or corporate structure are very successful at providing owners/members with a great deal of protection the overwhelming majority of the time, one shouldn’t make the mistake of thinking his or her personal assets are entirely immune regardless of the circumstances.