One of the primary reasons many business owners form a limited liability company (LLC) for their business is to protect themselves from personal liability for the activities of the business. As I wrote in a previous blog post discussing why a single-member LLC needs an operating agreement, under Washington law, members of LLCs may be held personally liable for the acts, debts, obligations, and liabilities of the LLC if shareholders of a corporation would be held liable under the same circumstances.
When are corporate shareholders or LLC members held personally liable for the acts of the LLC or corporation? When a court determines that the entity should be disregarded, which is often referred to as “piercing the corporate veil.” RCW 25.15.061 which addresses piercing the corporate veil for LLCs, provides: “Members of a limited liability company are personally liable for any act, debt, obligation, or liability of the limited liability company to the extent that shareholders of a Washington business corporation would be liable in analogous circumstances.”
Washington courts can and do pierce the corporate veil in lawsuits involving both corporations and LLCs. In considering whether to pierce the corporate veil, Washington courts will consider whether corporate formalities have been observed and whether the affairs of the corporation or LLC have been kept separate from those of the individual members or shareholders. Such corporate formalities include holding regular meetings with minutes and conducting the affairs of the corporation or LLC in accordance with its bylaws or LLC company agreement.
When a LLC fails to treat the LLC as an entity separate from the personal affairs of the individual members by co-mingling corporate and personal finances, by failing to hold regular meetings, or by failing to have – or follow – a LLC company agreement, a court is more likely to allow the corporate veil to be pierced. Conversely, if the LLC observes these corporate formalities, the entity is more likely to be respected. In cases where fraud is alleged, Washington courts will look at whether the entity has been intentionally used to violate or evade a duty to a third party and also determine whether the entity must be disregarded in order to prevent injustice to the injured party. Columbia Asset Recovery Group, LLC v. Kelly, 177 Wn.App. 475, 487 (Div. 1 2013).
Questions about how your LLC can protect its members from individual liability or concerning limited liability company agreements? We’re happy to help!