A limited liability entity, such as a LLC or Corporation, is an important part of protecting your individual assets from liabilities arising from your business. By operating the business within the limited liability entity, lawsuits stemming from the business – such as contractual claims or damages from personal injuries – generally will be restricted to pursuing claims against the business itself and the assets owned by the business. Your personal assets, held outside the business entity, are typically left untouched. You may need to liquidate the assets held in the business to pay the judgement, or even have the business declare bankruptcy. Obviously paying any claim, even if limited to company assets is not ideal, but the losses at least stop there and you personally will be spared from needing to pay.

This legal separation between you and your business for purposes of liability is known as the “corporate veil.” Over the years, courts have developed rules around the limits and exceptions to the protection of the corporate veil, sometimes to remedy an otherwise unequitable situation and sometimes to prevent individuals who sought to take advantage of the rule. When courts decide to override the limited liability status of an entity and allow a claimant to pursue the owners individually, it is known as “piercing” the corporate veil. This can be particularly disastrous to an owner of multiple businesses, as once a debt has reached them personally, the assets of their other entities are also at risk through a “reverse pierce.” The individual cases where judges have ruled for a piercing of the corporate veil have developed into a few broad categories which now form the precedent judges consider when deciding whether to uphold or pierce the veil in any given case. If you wish to rely on the corporate veil to protect you in the event of a large lawsuit, you should be aware of the triggers for veil piercing listed below and work to ensure that business operations are conducted in a way that will not trigger them.

1. Fraud. Unsurprisingly, courts do not look kindly upon parties who actively seek to defraud others. Fraud might be the source of the lawsuit itself or committed in an effort to avoid the consequences of the lawsuit. Both may cause a court to consider piercing the corporate veil to allow the victim of the fraud to better recover their damages. This exception is often applied after “fraudulent conveyances” are made to remove assets from the entity after a legal claim is known of but before the claimant can secure payment. For example, transferring all of the cash in the business account to the owner’s personal account in the middle of a lawsuit and then claiming the business lacks the funds needed to pay the judgement. Here, an owner’s desire to save the money in the business account from the lawsuit may ultimately backfire and lead to all of their assets being subject to the claim.
2. Lack of Formality of Entity Operations. Maintaining an entity separate from you as owner requires certain formal processes and bookkeeping requirements. Entities can be created fairly simply by filing with the state department of financial institutions, but it is important to fully flesh out the organization with proper agreements, resolutions, etc. Failure to properly keep up these formalities may give grounds for piercing the corporate veil if the record keeping is sufficiently lacking or may tip the scale when paired with other considerations. One of the reasons LLCs are such a popular choice of entity type is that they require substantially less formality than corporations. Bear in mind, even the relatively simple requirements of LLCs still require some formalities to properly form and maintain.
3. Undisclosed Corporate Principle. In order to effectively claim your limited liability entity is the appropriate party to sue and not you personally, you should be able to show that the plaintiff knew or should have known they were dealing with your limited liability business – not you personally – for the acts that gave rise to the lawsuit. In essence, it is unfair to prevent a plaintiff from suing the owner of a business personally if they thought they were dealing with that person personally. Even if the plaintiff knew they were dealing with a company, if they were not aware that company was a limited liability entity (for example if the contract uses most of the company name but omits the “LLC” or “Inc.”), they could still claim this principle should apply. This is why it is important to properly identify the company’s full name on all signage, advertising and, especially, in contracts. While you, as owner, will be signing your name to most contracts, it should be in your capacity as a representative of the business, not as the party to who the contract binds.
4. Undercapitalization. There is substantial caselaw of business owners attempting to take advantage of limited liability entities by keeping virtually no assets in the name of the business, so that when they are sued, there is nothing to take. Here again, getting too greedy in protecting assets can lead to jeopardizing additional assets. While keeping company assets relatively trimmed is a good practice, taking this too far can lead to a piercing of the corporate veil. As a general rule, the company should own at least sufficient capital and assets to be able to carry on its regular business. For example, in addition to reasonable operating funds in a business account, a real estate rental business should typically own the real estate it rents, an auto repair business should own the tools needed to complete the repairs. If ownership of physical assets is unclear, bills of sale should be prepared to formally transfer the assets into the name of the company.
5. Tortious or Professional Misconduct. A limited liability entity will not protect you as owner from personal liability for your personal improper or professionally negligent behavior. Incidents stemming from road rage while driving for business purposes or stealing a client’s property while in their home making repairs may well lead to a court denying you the protections of the limited liability entity as it was really you who did the act the lawsuit is about, not your company. Additionally, if you are a member of a profession that is held personally responsible for malpractice, using a limited liability entity will not prevent malpractice suits against you. For example, if a patient slips and falls in a doctor’s waiting room operated as a LLC, the corporate veil will likely prevent the patient from suing the doctor personally. If however the doctor commits malpractice while providing the patient medical services, the LLC should not hinder the patient’s medical malpractice claim against the doctor.
6. Lack of Separation Between Owner and Entity. For a court to treat you and your limited liability as separate, you should be able to demonstrate that you treated you and your entity as separate. This includes keeping separate bank accounts and using your personal funds for personal purposes and the company funds for company purposes. It also means keeping a clear record of what is owned by you and the company and respecting that distinction. If a lawsuit secures a judgement against your entity, these steps will be important to identify what belongs to you and what belongs to the company. If that distinction cannot be made, a court may elect to look past it and pierce the veil.
7. Contractual Agreements to Guarantee Debts of the Company. Banks, landlords and suppliers are aware that limited liability entities may result in their loans going unpaid or contracts unfulfilled and so, it is not unusual for contracts provided by these parties to include a clause having you, as owner, guarantee the debt of the limited liability entity. Most business loans and commercial leases contain such clauses, especially if your limited liability entity is small or has an unproven track record of paying its debts. To risk stating the obvious, if you as owner contractually agree to be personally responsible for a debt, you cannot use your limited liability entity as a shield to block such obligation. Keep track of what debts you have guaranteed and what debts you have not – if your business becomes insolvent, having such information on hand can prove important to properly allocate the remaining funds to creditors. If you have a business partner, you should also ensure the personal guarantees on the debts are spread over the owners equitably to avoid a situation where the business fails, they walk away free, and you are held liable for numerous company debts.

   If you have any questions about your LLC, please contact one of our experienced Business Attorneys.

As part of my business litigation practice, I regularly represent corporations and shareholders in corporations. On the shareholder side, parties often seek to learn more about what is going on with the corporation they partially own.

Wisconsin law gives shareholders in corporations certain inspection rights depending on the extent or length of their ownership interest in the corporation. Unless you satisfy certain criteria as a shareholder, your inspection rights are generally limited to viewing the corporation’s bylaws and a list of shareholders entitled to notice of a shareholders’ meeting.

If, however, you have owned stock for at least six months or own at least five percent of outstanding shares, your inspection rights as a shareholder are broader. In that case, you may be entitled to access the following:

1. Excerpts from any minutes or records that the corporation is required to keep as permanent records. These include: (a) Minutes of meetings of its shareholders and board of directors. (b) Records of actions taken by the shareholders or board of directors without a meeting. (c) Records of actions taken by a committee of the board of directors in place of the board of directors and on behalf of the corporation.
2. Accounting records of the corporation.
3. The record of shareholders.

While this information could give you a wealth of insight into the workings of a corporation you hold ownership in, you must have a reason to request the information. Specifically, to access the more detailed information described above, you are required to make a written request to the corporation stating a good faith purpose for your inquiry and the records requested must be connected to that purpose.

For more information on these rights please consult the Wisconsin State Legislature.

If you have questions about shareholder rights, please reach out to one of our experienced Business Attorneys.

The Wisconsin Legislature recently passed a new law governing limited liability companies in Wisconsin (the “Act”). The Act is primarily based on the most recent version of the Revised Uniform Limited Liability Company Act, albeit with certain Wisconsin specific modifications. The Act applies to all LLCs that are formed on or after January 1, 2023. Additionally, as of January 1, 2023, the Act will also apply to pre-existing LLCs unless they filed an election to be governed by the existing law by December 31, 2022. The following is a summary of some of the key differences between the previous law and the Act.

The Act has redefined the term “Operating Agreement” to include any agreement that is oral, implied, written, or any combination thereof that is between all members of the LLC, including a sole member, and pertains to the internal affairs of the company. The legislature also added a new definition for a “Written Operating Agreement” and the Act distinguishes what things may only be done via a written operating agreement.

Another difference is that the Act has altered the requirements for filing the Articles of Organization. The Act will now allow organizers to file their own form of the Articles of Organization with terms addressing more matters than previously allowed to be addressed. Moreover, the Articles of Organization will no longer be required to state the type of management style of the LLC. This will allow more flexibility for the LLCs to change their management style without having to amend their Articles of Organization.

Additionally, the Act has eliminated the idea of apparent authority and has clearly established that members of an LLC do not have authority as a result of simply being a member. In order to clarify the authority of a certain position, a certain individual, or to clarify certain limitations of authority for a position or person, the LLC may file a Statement of Authority, which will be effective for five years. Because this document is only effective for five years, LLCs will need to be cognizant of renewing, amending, and or cancelling the Statement of Authority as changes are made within the company.

Some other differences are that non-economic members will now be allowed under the Act. This means that an individual may become a member without being required to make a contribution or acquire a transferable interest. Furthermore, the Act alters how LLCs that are taxed as partnerships are to handle distributions and voting power. In addition to the aforementioned changes, the Act goes on to address and modify various other items, such as wrongful dissociation, priority of distributions of assets in the dissolution of the LLC, mergers, interest exchanges, conversions, and domestication.

While there are some important differences between existing law and the new Act, most of these changes will not materially affect existing LLCs that have a well drafted written Operating Agreement. That being said, we still recommend that all LLC owners seek the advice of a business law attorney to determine whether the Act will impact your LLC and to periodically review your Operating Agreement to ensure it is still appropriate for your situation.

If you have questions about the new Act or how it may affect your LLC, do not hesitate to reach out to one of our experienced business law attorneys.