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02.11.21   |   Insights

Piercing the Corporate Veil of Limited Liability Companies

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An issue that consistently arises for parties who are transacting business with single-member limited liability companies (LLCs) is whether the member of these legal entities can be held individually liable for the company’s wrongful conduct. This is especially prevalent in residential construction and renovation projects where many contractors operate as single-member LLCs. In many cases, the legal entity itself will have very limited assets and may be difficult to collect upon even should a plaintiff prevail in litigation against a single-member LLC.

The general principle of Ohio law, as codified in Ohio Revised Code § 1705.48(B), sets forth that members, managers, and officers of LLCs are not held personally liable for the debts, obligations, or liabilities of the company solely by reason of holding a position as member, manager or officer. This statute, however, does not end the analysis.  Under Ohio law, a Court can exercise its authority to “Pierce the Corporate Veil” under limited circumstances.  Piercing the corporate veil is the judicial act of imposing personal liability on otherwise immune corporate officers, directors, and shareholders for the corporation’s wrongful acts. 

The Ohio Supreme Court has set forth the elements that must be present in order to pierce the corporate veil:

 (1) control over the corporation by those to be held liable was so complete that the corporation has no separate mind, will, or existence of its own;

 (2) control over the corporation by those to be held liable was exercised in such a manner as to commit fraud or an illegal act against the person seeking to disregard the corporate entity; and

(3) injury or unjust loss resulted to the plaintiff from such control and wrong.

The first element of the above list has been referred to as the “alter ego doctrine” whereby the court will determine whether the individual and limited liability company are fundamentally indistinguishable. Courts making a determination of this element will review the following factors: (1) whether corporate formalities were observed, (2) whether corporate records were kept, (3) whether corporate funds were commingled with personal funds, and (4) whether corporate property was used for a personal purpose.

In relation to the second element, a party must show that the individual exercised control over the limited liability company in such a manner as to commit fraud, an illegal act, or a similarly unlawful act. It is not enough to show that the actions of the individual controlling the LLC were simply unjust or inequitable but such actions must rise to the level of fraud or illegality.

Finally, under the third element, the damages being alleged must be shown to have been caused by the actual control or wrongdoing.

In order to successfully pierce the corporate veil to hold an individual LLC member or officer liable, all three of the above elements must be proved. Courts have held that because limiting the liability of members and officers is the general rule, piercing the corporate veil should be a rare exception used only in cases of fraud or other certain exceptional circumstances. However, a party that is able to meet these requirements and pierce the corporate veil will be able to hold the individual member liable and look to the individual assets along with the company assets in seeking compensation for wrongful conduct.

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