Court Allows Inside Piercing of Corporate Veil

Paule, Camazine & Blumenthal, P.C. posted in Business and Corporate on Tuesday, March 03, 2015.

By: Patricia L. Bland

As many LLC members are aware, business entities (such as LLCs) are regarded as wholly separate legal entities from the members who compose them. Therefore, the members of an LLC are not liable for the debts of that entity. However, the abbreviation LLC must be remembered: Limited Liability Company. This means the protection an LLC provides its members is not absolute. The law in Missouri allows the “corporate veil” of an LLC to be pierced in narrow circumstances, in order to hold individual members liable for an LLC’s debts.

In order to pierce the veil and show the LLC is being used inappropriately, a three-pronged test must be met: (1) Complete domination of finances, policy, and business practices with respect to a transaction so that the corporate entity with respect to that transaction had no “separate mind”; (2) The control must have been used to commit fraud, perpetrate the violation of a statute or other legal duty, or to commit a dishonest and unjust act in contravention to a plaintiff’s legal right; and (3) The control and breach of duty were the proximate cause of the injury or unjust loss.

This piercing usually applies to creditors who have third party claims against the LLC. Recently, however, courts in Missouri have ruled that a minority member of an LLC may pierce the veil of his or her own LLC to seek recovery for liability of the LLC upon the majority shareholders under appropriate circumstances. This so-called “inside veil piercing” allows a member to take advantage of this remedy for the member’s own benefit and disregard the corporate form for which he or she is a part. In plain language, a member of an LLC can move to pierce the veil protecting that member so as to hold other members responsible for an injury or loss. This benefit does not extend to poor business decisions performed in good faith by the members; the three-pronged test outlined above must still be met.

An LLC can be a great option when creating a business, but there are still pitfalls. It is important to consult a business attorney with experience in drafting LLCs in order to discuss the advantages an LLC can provide.

For more information, see Hibbs v. Berger, 430 S.W.3d 296, 306 (Mo. Ct. App. 2014)

Disclaimer

Patricia L. Bland

Patricia L. Bland

A graduate of University of Missouri – Kansas City School of Law that also received her Master of Law in Taxation from UMKC, attorney Patricia Bland's legal practice includes the areas of business law and commercial transactions. She also handles taxation, real estate and estate planning matters.

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