Presented by Ryan M. Lower of the Morris La Gro pMorris Law Group

History of LLCsHistory of LLCsThe LLC form came from demand for an business organization that gives owners limited liability without the double tax th t li t tithat applies to corporations.

In 1977, Wyoming passed the first LLC act. After the IRS confirmed that LLCs

fwould be treated like partnerships for federal tax purposes the remaining t t d t d i LLC t t tstates adopted various LLC statutes.

Defining LLCs

Unincorporated entityF d th h fili ith th t t d Formed through a filing with the state under LLC statuteM b d t li bl f th Members and managers are not liable for the entity’s obligations

Relationship of members, managers, and the entity is defined by agreement and default t t t lstatutory rules

Limited LiabilityLimited Liability

No member of the LLC is liable for theNo member of the LLC is liable for the LLC’s obligations solely based on being a member or manager.g

Generally members and managers areGenerally, members and managers are liable based on breaches of their own duty of care or contractual obligationsof care or contractual obligations.

“Except as otherwise provided inExcept as otherwise provided in subsection (c) (providing for liability by consent or by provision in the articles)consent or by provision in the articles), the debts, obligations, and liabilities of limited liability company, whether arising y p y, gin contract, tort, or otherwise, are solely the debts, obligations, and liabilities of gthe company. A member or manager is not personally liable for a debt, obligation, or liability of the company solely by reason of being or acting as a

b ” ULLCA ' 303( )member or manager.” ULLCA ' 303(a)

Example of limited liability under statute

Nevada law states that "[u]nlessNevada law states that [u]nless otherwise provided in the articles of organization or an agreement signed by g g g ythe member or manager to be charged, no member or manager of any limited-g yliability company formed under the laws of this State is individually liable for the debts or liabilities of the company." Nev. Rev. Stat. § 86.371.

Member not a proper party to a lawsuit against the LLC

“A member of a limited-liability company isA member of a limited liability company is not a proper party to proceedings by or against the company . . . ." Nev. Rev. Stat. g p y§ 86.381.

Debts, obligations, and liability belong solely to companycompany

Many courts have relied on this type of y yplanguage to deny veil-piercing claims. See Larry E. Ribstein & Robert R. yKeatinge, 1 Ribstein and Keatinge on Limited Liability Company, § 12:2 (2d ed. 2015) (collecting cases).

Member Liable to LLCMember Liable to LLC

Members are liable to the LLC for failureMembers are liable to the LLC for failure to make contributions required under the operating agreement.p g g

A member is liable to the LLC:(a) For a difference between the member’s contributions to capital as actually made and as stated in the articles of organization or operating agreement as having been made;

dand(b) For any unpaid contribution to capital

hi h th b d i th ti l fwhich the member agreed in the articles of organization or operating agreement to make in the f t re at the time and on the conditionsin the future at the time and on the conditions stated in the articles of organization or operating agreement Nev Rev Stat §operating agreement. Nev. Rev. Stat. §86.391(1).

Charging OrderCharging Order

Judgment creditor of a member may Judgment creditor of a member may charge the member’s interest with payment of the unsatisfied amount of p ythe judgment with interest. Nev. Rev. Stat. § 86.401(1).§ ( )

This means judgment creditor can execute on any distributions made to the ymember.

Limits of a Charging OrderLimits of a Charging Order

Nevada law provides that:Nevada law provides that: A charging order is the creditor’s

exclusive remedy against member’s LLCexclusive remedy against member s LLC Interest.

Judgment creditor of member may not Judgment creditor of member may not foreclose on membership interest in the LLCLLC.

Nev. Rev. Stat. § 86.401(2)

Piercing the “Corporate” VeilPiercing the Corporate Veil

The common law has long recognized The common law has long recognized the equitable remedy of “piercing the corporate veil” when a corporation acts p pas the alter ego of the controlling individual.

Many states added the alter ego doctrine to their corporation statutes. pSee, e.g., Nev. Rev. Stat. § 78.747(1).

Requirements for Piercing the Corporate Veil: the corporation must be influenced by the corporation must be influenced by

the person asserted to be the alter ego; there must be a unity of interest that there must be a unity of interest that

one is inseparable from the other; and adherence to the corporate fiction of a adherence to the corporate fiction of a

separate entity would sanction fraud or promote injusticepromote injustice.Polaris Indus. Corp. v. Kaplan, 747 P.2d 884 886 (Nev 1987)884, 886 (Nev. 1987).

QuestionQuestion

Does the Alter Ego Doctrine Apply to Does the Alter Ego Doctrine Apply to Limited Liability Companies?

AnswerAnswer

Yes under statute or case law Yes, under statute or case law. Maybe?

Alter Ego Doctrine Applicable to LLCs under State Statute Cal Corp Code § 17703 04(b) (“A Cal. Corp. Code § 17703.04(b) ( A

member of a limited liability company shall be subject to liability under the j ycommon law governing alter ego liability”).y )

Other states with similar statutes: Colorado, Minnesota, North Dakota, , , ,Texas, Washington, and Wisconsin

Alter Ego Doctrine Applicable to LLCs under Case Law Courts in many states have held that veil Courts in many states have held that veil

piercing applies to LLCs

Arguments against applying alter ego to LLCs LLCs are different from corporations per LLCs are different from corporations per

statute. LLCs receive little funding from LLCs receive little funding from

members so inadequate capitalization arguments fail.arguments fail.

LLCs are less formal than corporations so a failure to observe formalities is hardso a failure to observe formalities is hard to show.

Very fact intensive Very fact intensive.

Nevada undecided

Bankruptcy court predicted that Nevada

Nevada undecided

Bankruptcy court predicted that Nevada would apply the apply ego doctrine to LLCs. In re Giampietro, 317 B.R. 841, p , ,846 (D. Nev. 2004).

It is for the legislature, not the courts, to It is for the legislature, not the courts, to rewrite Nevada's LLC statute. Holiday Ret. Corp. v. State, DIR, 274 P.3d 759, p , , ,761 ( Nev. 2012) ("It is the prerogative of the Legislature, not this court, to change or rewrite a statute.")