> if you form your small business as an SMLLC, and observe a few basic rules (such as keeping business finances separate from personal finances), you should be personally protected from most kinds of business liability
Single-member LLCs which are run properly still get liability protection.
Courts in a variety of states have “pierced the veil” of a single-member LLC from the outside and have held that it is not a separate entity and thus may not be used to protect the assets of the LLC from the creditors of the member.
You get liability protection, yes, but not as much as you would if you had one more member. The veil can be pierced for various reasons, so to reduce risk you want to minimize those reasons as much as possible.
I think this is interesting in that I don't know many people who view LLC's protections this way. The classic example is that if your rental property is in an LLC, then your tenants can't win a suit and get to your own personal house.
These examples of piercing the veil are from the other direction - a personal suit getting access to the LLC assets... Which sort of makes sense - the alternative would be the court ordering the seizure of my assets - which would be my ownership stake in the LLC. So in their example, I'd still expect to lose my ownership stake in my LLC by asset seizure even if I was in a multi-owner LLC... Or had stock in an S-corp.
The rental property investors I’ve known usually form an LP with an LLC as the general partner. Both entities will be solely devoted to a single piece of property. The limited partners are often involved in multiple investments. The LP will often contract a sister LLC for services like property management...so the rent checks get written to an LLC that can screw up without putting the real property asset at direct risk.
The examples cited are how the courts pierced the LLC veil to satisfy someone's personal liabilities. This seems like it's unavoidable because no matter how you split it up, the courts will seize your assets to pay that liability - the effect would be the same if the courts just grabbed the owner's stake in the LLC's.
Your example is what most people think of - LLC's shielding each other and the owners.
I'm mostly pointing out that the parent comment's link is a bit of a boogeyman in that you could have a perfectly structured LLC system, and if you are personally criminally negligent and liable to pay, then the courts will still get your stakes in the LLC's.
That’s why the operating agreement of the LLC should have a charging order protection. It discourages reverse piercing. A charging order protection will allow the LLC to stop distributions to a member who lost such a court case.
In case of an LLC taxed as a partnership the creditor will need to pay the taxes as stated on the K1 but doesn’t receive actual money. Obviously this will make it very unattractive to the creditor to go for a charging order on your membership in the first place.
Piercing the veil can occur for many different reasons, including some as simple as improperly kept notes of annual meetings. Consult with a lawyer to be sure every formality is followed.
