When Will a Member or Shareholder Be Liable for Company Debts?
We have previously posted about a member’s exposure for the debts of an LLC. We thought it also would be useful to discuss additional situations when a member or a shareholder will be liable for the LLC’s or corporation’s obligations.
Florida courts, like many other U.S. jurisdictions, recognize a doctrine often called “piercing the corporate veil.” This is a doctrine developed in Florida common law, rather than from a statute. When a court “pierces the veil,” it will disregard the corporate entity and treat the liabilities of the company as the liabilities of each individual member or shareholder. So, for example, the Acme Company has two shareholders, Larry and Curly. If Moe sues Acme Company, under normal circumstances, he can get a judgment against the company only. However, if the court “pierces the veil,” Moe will get a judgment against Larry and Curly jointly instead of and in place of his judgment against the company.
As we described previously, however, members of an LLC will not be liable individually absent some kind of wrongdoing. The same is true under the common-law “piercing the veil” analysis applicable to both corporations and LLCs. Florida courts generally look for three elements before holding individual shareholders or members liable for the company’s obligations:
- the shareholder or member dominated and controlled the company to such an extent that the company did not have an independent existence, i.e., the company was a mere “alter ego” of the shareholders/members (essentially, a sham company that has no practical separate purpose from its owner);
- the company was used for a fraudulent or improper purpose; and
- the fraudulent or improper purpose caused the plaintiff’s injury.
The main overarching point here is that Florida law will not allow the veil to be pierced on the mere fact that one or a few people own the company and is not enough to hold the individuals, instead of the company, liable. Oftentimes, people want to “pierce the veil” when a company has only one or a handful of shareholders or members. This desire often has practical appeal. If Larry and Curly are the only members of Acme Company, and Acme Company owes you money, one’s natural reaction would obviously be to make Larry and Curly pay.
Following that logic, however, would defeat the purpose of doing business through an LLC or a corporation. If a company is doing business in good faith but just happens to have a single owner, why should that single owner bear the company’s burden any more so than the shareholders of a major blue-chip corporation? Thus, as a compromise, courts over several generations began requiring that a plaintiff show that the company was used for fraudulent or improper purposes before the corporate existence is discarded.
Thus, while it is difficult to hold LLC members or corporate shareholders liable for the obligations of the company, it is not impossible. If you’re considering suing the members or shareholders of a corporation or are facing such a suit, give us a call and we will discuss your options.