If you want to launch a business venture without risking your personal wealth, you might consider setting up a limited liability company. After all, according to the Journal of Accountancy, shielding the owner’s personal assets from the venture’s creditors is a common and valuable reason to form an LLC.
While an LLC’s personal asset protections are solid, they are not indestructible. That is, in certain circumstances, courts set aside an LLC’s protection and hold its owner personally liable for the venture’s debts. Lawyers call this piercing the LLC’s corporate veil.
A difficult process
When it comes to setting aside an LLC’s liability protections, some states are friendlier to creditors than others. Florida is comparatively unfriendly. Indeed, it is usually difficult for creditors to convince a court to pierce the corporate veil.
A three-pronged test
Even though it is difficult to pierce an LLC’s corporate veil, it is not impossible. To be successful, creditors must have evidence of three things:
- Rather than being a genuine business, the LLC is just an instrument or alter ego of its owner.
- The LLC engaged in fraud or another type of improper conduct.
- The creditor suffered damage.
Proving these elements can be a challenge for a creditor, especially if the LLC’s owner has engaged in lawful and ethical conduct. Moreover, if the owner complies with LLC formalities, it can be tough to pierce the LLC’s corporate veil. This is true even if creditors have damages.
Ultimately, while there is always some risk one of your LLC’s creditors might try to pierce its corporate veil, knowing how difficult piercing is should put your mind at ease.