Many clients inquire whether a limited liability company (LLC) makes one immune from personal liability under Ohio law. Unfortunately, the question is not absolutely clear.
Limited liability companies (LLCs) provide significant liability protection to their owners. Members of limited liability companies generally are not responsible for debts of the LLC. A recent Ohio case, however, serves as a reminder that creditors may attempt to “pierce the corporate veil” and hold an owner personally liable for debts of the entity.
In RCO International Corporation v. Clevenger, 180 Ohio App.3d 211 (2008), the Plaintiff brought a breach of contract action against an LLC and its two members. While the lower court granted summary judgment in favor of the owners, an Ohio appeals court held that the creditor may have made sufficient allegations against the owners, to sue them personally. While the Plaintiff did not allege fraud, it did allege an illegal act (the company’s sending a false invoice). On the surface, the facts of this case did not seem to present a strong case for “piercing the corporate veil.” The decision, however, may have rested on certain procedural issues. In any event, this recent case is a good reminder that simply forming an LLC does not in and of itself automatically give the owner limited liability in all circumstances.
There are certain steps that can be taken to prevent a creditor from “piercing the corporate veil” and holding an owner personally liable, including the following:
- Make sure your LLC is properly set up. If you are setting up an entity without the help of an attorney, you may not be taking all the necessary steps to make sure that the entity is properly formed.
- Observe formalities once the entity is formed. An LLC should have an Operating Agreement, and the terms of that Operating Agreement should be followed. Your entity should have a separate bank account and be treated as a separate entity.
- Your LLC should have usual and customary insurance for whatever business it is conducting. A court is far more likely to try and “pierce the corporate veil” if the owner has intentionally failed to provide customary insurance for the entity’s activities.
- Follow good business practices. Forming an entity will not shield an individual owner from fraud or illegal acts.
The leading court decision in Ohio, Belvedere Condominium Unit Owners Association v. R.E. Roark Companies, 67 Ohio St. 3d 274 (1993), as well as decisions in many other states, make clear that if usual and customary practices are followed, a LLC should provide limited liability protection for its owners.
Notwithstanding the RCO International Corporation decision, it is pretty well settled that a limited liability company insulates the owners from the debts of the company.
Recently, an Ohio court re-affirmed basic LLC protections. In Dover Phila Heating v. SJS Restaurants 185 Ohio App.3d 107, 2009-Ohio-6187, the Ohio Court of Appeals for the Fifth Appellate District confirmed once again that members of a limited liability company generally have no responsibility for the debts of the entity. The court noted that pursuant to Ohio Revised Code §1705.48(B), neither the members of the limited liability company nor any managers of the limited liability company are personally liable to satisfy any judgment, decree, or order of a court for, or are personally liable to satisfy in any other manner, a debt, obligation, or liability of the company solely by reason of being a member or manager of the limited liability company.
While there is nothing surprising in this recent decision, it re-affirms the fact that Ohio court have been quite protective of LLCs.
The question of whether the corporate veil of an LLC may be pierced remains to be seen. If LLC members take the necessary steps to treat their business like a business they will continue to be insulated from personal liability. However, if history has taught us anything, the landscape of this matter can change at any time, however, given the current makeup of Ohio’s Supreme Court it is probably unlikely to change any time soon.