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. In this regard, the court may consider the factors and policies set forth in established case law with regard to piercing the corporate veil, except that the failure to hold meetings of members or managers or the failure to observe formalities pertaining to the calling or conduct of meetings is not a factor tending to establish that the members have personal liability for any act, debt, obligation, or liability of the limited liability company if the certificate of formation and limited liability company agreement do not expressly require the holding of meetings of members or managers.
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. However, “[w]hen the shareholders of a corporation, who are also the corporation’s officers and directors, conscientiously keep the affairs of the corporation separate from their personal affairs, and no fraud or manifest injustice is perpetrated upon third-persons who deal with the corporation, the corporation’s separate entity should be respected.” Grayson v. Nordic Const. Co., Inc., 92 Wn.2d 548, 553 (1979). 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).
Note that RCW 25.15.061 (discussed above) excludes observing formalities for holding meetings as a factor in determining whether an LLC should be disregarded as an entity separate from its members if the certificate of formation and limited liability company agreement do not expressly require the holding of meetings of members or managers. If the LLC does not have a company agreement, however, it follows that both the failure to observe corporate formalities in holding meetings and the lack of a company agreement could count as factors in favor of piercing the corporate veil and holding the individual members liable for an act of the LLC on the grounds that the LLC’s members failed to observe corporate formalities.
Questions about how a LLC can protect its members from individual liability or concerning limited liability company agreements? We’re happy to help!