A limited liability company (or “LLC”) is a somewhat recent development in state laws that strikes a compromise between the two older forms of business entities: the corporation and the partnership. The concept of limiting the liability of an entity dates back at least to 15th century English law and finds its American roots in the early 19th century. In 1993, the Missouri Limited Liability Company Act came into effect, dramatically altering the business landscape in the state. The Act allows for individuals and groups of people to organize a company and limit their liability for the debts of that company to only the amount in which they invested, thereby combining the limited liability of a corporation with the pass-through taxation of a partnership or sole proprietorship. However, this protection from personal liability is not absolute.
What is “Piercing the Corporate Veil”?
Ordinarily, an LLC is regarded as a separate entity, distinct from the members who compose it. Occasionally, courts will disregard the business entity’s identity, and permit creditors to “pierce the corporate veil,” which means that shareholders of a corporation or members of the LLC must satisfy the creditors’ claims. Hibbs v. Berger, 430 S.W.3d 296, 306 (Mo. App. 2014). To pierce the veil of an LLC, Missouri courts apply a three-part test.
First, the defendant-member must have complete domination of the company, including the financial, policy, and business practices thereof. In Family Support Div. v. Steak’m Take’m LLC, the Missouri Court of Appeals for the Western District held that an LLC’s veil may be pierced where it has a sole member who owns the entire company; the sole member had complete control over finances, management, and decision-making; and the sole member had complete control over all incoming and outgoing cash and sole authority to sign on the bank account and make tax elections. 524 S.W.3d 584, 593 (Mo. App. 2017).
Second, the defendant-member must use their control of the LLC to commit fraud or wrong, to perpetrate the violation of a statutory or other positive legal duty, or dishonest and unjust act in contravention of the plaintiff’s legal rights. In KC Roofing Center v. On Top Roofing, the defendant operated an intricate corporate shell game in which he would cease doing business as one corporate entity when he was unable to pay the corporation’s creditors and he then would form another corporation in place of the prior one in order to get a “fresh start.” 807 S.W.2d 545, 549 (Mo. App. 1991). In Hibbs, the court declined to pierce the veil because the plaintiff failed to show that the defendant-members either perpetrated fraud to hide assets, under-capitalized the company, or otherwise used limited liability for improper purposes. 430 S.W.3d at 312.
Third, the aforesaid control and breach of duty must be the proximate cause of the injury or unjust loss complained of. The defendant-member’s conduct is the proximate cause of an injury if the conduct is so closely connected with the injury and of such significance that the law is justified in imposing liability. This means that the defendant’s conduct can still be actionable where it is an indirect cause of injury and not by itself a direct cause.
How to maintain limited liability
While many LLCs may satisfy the “control” part of the test, member-owners can avoid being held personally liable by conducting business in an above-board manner. This means, among other things:
- Ensuring the business is sufficiently capitalized to handle obligations before assuming them;
- Observing corporate formalities, such as holding regular meetings and keeping minutes of those meetings; and
- Keeping business funds separate from personal funds.
Missouri courts are clear: the veil will be pierced where an LLC is used for an improper purpose and to perpetrate injustice to avoid its legal obligations. And business owners who play fast and loose with the rules may find creditors knocking at their doors.
If you need help with or have questions about legal issues concerning your limited liability company, then contact Lipscomb Law today.
Authored by Andrew Lipscomb