A limited liability company is a legal entity where the business has its own debts and assets which remain separate from the owner’s personal finances. It allows the business owner to be protected against law suits, debts and other liabilities from the operation of the business. As an example, if the business owner has a home, car and personal bank accounts in his or her own name and the business is set up as an LLC with separate bank accounts and assets under the ownership of the LLC, a law suit against the LLC cannot affect the business owners home, car or personal bank accounts.
An exception to LLC protection against attaching a business owners personal assets is the rare instance where a Court would Pierce the Corporate Veil and allow personal assets to be attached to the law suit.
In Pennsylvania, Courts will consider multiple factors in determining when to pierce the veil, including: (1) gross undercapitalization of the corporation; (2) failure to observe corporate formalities; (3) substantial commingling of corporate and personal affairs; and (4) use of the corporate form to perpetuate a fraud. Pennsylvania courts, however, are extremely reluctant to go down this road. Because of that, a plaintiff must have relevantly strong evidence to prevail on a veil-piercing theory.
In New Jersey, veil piercing is an equitable remedy only rarely allowed by courts and is limited to situations in which the corporation’s principals (or parent company) (i) so dominated the corporation that they can be said to be the “alter-ego” of the corporation; and (ii) misused the corporate entity to perpetrate a fraud or crime or otherwise work an injustice. A number of factors have been found relevant to a veil piercing analysis, including whether the corporation is undercapitalized, whether the corporation failed to observe corporate formalities or failed to maintain corporate status with the State.
As evidenced above, if you set up a business as an LLC, it is very difficult for your personal assets to be attached to a lawsuit or claims of a debtor against the LLC.
Another benefit of an LLC is that it allows for the pass-through taxation benefits of a business partnership or sole proprietorship along with the limited liability protection that comes with being a corporation. That means that from a tax standpoint, the LLC profits and losses are filed with the business owners personal tax return and are subject to personal tax rates, not corporate tax rates.
If you have further questions about setting up an LLC or determining which legal entity is best for your business needs, please contact me.