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Are you liable for your Limited Liability Company? | LLC Asset Protection & Personal Liability - YouTube
Channel: All Up In Yo' Business with Attorney Aiden Durham
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hi everyone i'm attorney aidan durham
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with 180 law co in denver colorado
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and you're watching i'll open your
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business
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in this episode of all opinion business
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i'm going to talk about
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liability to llc members
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what it means and how it can come up
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because i found that there's a lot of uh
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confusion
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and misunderstanding about
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llc's specifically single member llc's
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and how
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the members can individually be
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liable for something and
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how liability of the members can
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come up so i'm going to dispel
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all those myths about liability
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protection from an llc
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and let you guys know really what it
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means to be a single member llc
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and how that might affect you but before
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we get into it please be sure to like
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subscribe and share and uh don't forget
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to check the description for links to
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some additional information and
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resources and you can also download my
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free guide
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on how to pay yourself in a single
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member llc
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so really quick before i get into the
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meat of this video
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i want to explain i i'm licensed in
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colorado
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my knowledge and my expertise really is
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colorado law and i know
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some stuff about other states but laws
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are very different
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from state to state so the things i'm
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going to be talking about in this
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episode
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are primarily based on colorado law
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however the general concepts and the
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general ideas
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are for the most part consistent uh
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through all the states but
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i just want you all to keep in mind that
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the words that i'm going to be using and
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the things i'm saying
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won't necessarily specifically apply to
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you
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if you're not in colorado so when we
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talk about
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llcs or even corporations these
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llcs and corporations are distinct legal
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entities separate from their
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shareholders or their members
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separate from their owners one distinct
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uh primary advantage of an llc or a
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corporation
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comparing this to something like a
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general partnership or a sole
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proprietorship
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the owners and the managers have limited
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personal liability for the company's
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debts
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and so what this means is that the
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shareholders the members the managers
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the people who own and
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operate the business usually can't be
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held responsible for the liabilities or
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the obligations or the debts
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of the company they usually can't be
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held
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personally responsible for those things
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but
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under the right circumstances or rather
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under the
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wrong circumstances a court may decide
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to hold the individuals or an individual
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owner responsible for those debts and
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obligations
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of course an llc member
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the the main reason we start an llc is
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because we want to protect
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our personal liability and we want to
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insulate and protect our own assets like
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our home or our personal bank accounts
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our personal retirement accounts and
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those things
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that's why we do the llc in the first
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place usually
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and there are two concepts which are
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closely related but they're very
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different
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two concepts that come up when we talk
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about personal liability and liability
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for business debts that come up and this
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is where the confusion often
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arises because these two concepts are
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related
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but they are very very different and
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what i'm talking about
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is piercing the corporate veil versus
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charging orders which is another
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commonly used term
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when we're talking about liability to
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individual business owners
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so like i said business owners will
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generally form a corporation or an llc
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with the intent of insulating and
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protecting
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and limiting their personal liability
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but sometimes a court will
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regardless will hold that member
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personally liable for the deaths of the
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llc
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and this situation is called piercing
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the corporate veil
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if a creditor of the llc
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sues the llc the court might
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pierce the corporate veil and decide to
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hold the
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member personally liable for those debts
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i've talked a lot about piercing the
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corporate veil
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in previous videos so i'm not going to
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go into too much depth about that
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if you want more info on piercing the
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corporate fail you can check
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to some of these videos but um i'm not
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going to go into too much but
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piercing the corporate veil this term
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corporate veil
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um it applies to corporations and llcs
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and specifically in colorado as it
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applies to corporations the law says
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unless otherwise provided for in the
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articles of incorporation a shareholder
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i'm i'm reading it so i don't get it
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wrong
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this is what the the actual law the
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statute says
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unless otherwise provided in the
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articles of incorporation a shareholder
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of a corporation is not personally
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liable for the acts or debts of the
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corporation
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except that such person may become
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personally liable
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by reason of the person's own acts or
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conduct
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so basically what that's saying is by
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law
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by default shareholders of a corporation
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aren't personally liable unless
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they may be held liable by reason of
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their own activity or conduct
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and as a general rule that same
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protection extends to limited liability
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companies and
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members of llcs but there's a
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notable exception in colorado statutes
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where it says
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in any case in which a party seeks to
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hold the members of a limited liability
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company
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personally responsible for the alleged
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improper actions of the llc
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the court shall apply the case law which
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interprets the conditions and
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circumstances
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under which a corporate veil of a
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corporation
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may be pierced under colorado law
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okay what does that mean basically
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that's saying
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that courts can take the corporate
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concept of piercing the corporate veil
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and apply it to
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limited liability companies and apply
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that same concept
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so really what those two statutes are
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saying in colorado
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is that we take the same idea as it
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applies to
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corporations and we apply that to llcs
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when we're talking who's liable for
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corporate debts
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again i've gone into this in more detail
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in other videos but the
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overarching idea and the concept of
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piercing the corporate veil
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is separateness between the business and
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the owner themselves or the owners
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themselves
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and this theory of alter ego
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and is the business just a an extension
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of the owner themselves and so if a
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court
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determines that um this separation
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hasn't really been kept and that there
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was some
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uh improper use of the llc
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by the members then the court may decide
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to
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pierce the corporate veil and then in
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that case the
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llc's creditors can proceed against the
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members own home or
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bank accounts or investments or other
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assets that the individual member
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has so now let's take that piercing the
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corporate veil and compare this to
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charging orders which are very different
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things so even if an llc doesn't get
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pierced the corporate veil if the veil
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stays intact
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a charging order still allows attachment
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of an
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llc member's interest in
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the llc so to illustrate this let's use
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a couple of examples
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let's say i go on a shopping spree
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um you know we're still kind of in
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quarantine from covid19 right now
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i'm bored at home doing an online
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shopping uh
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spree and i rack up ten thousand dollars
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of debt on my personal credit card
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if i refuse to pay this legitimate debt
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that i have
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personally incurred then a creditor
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that credit card company my creditor can
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sue me in court and try to obtain a
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charging order
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to be able to collect on that debt and
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so in
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in every state um a creditor
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can go after the members or an
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individual's personal assets for
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legitimate personal debts so like um
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creditors can garnish wages so that's
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the typical
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method that we think of but then in some
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states where these
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charging orders are allowed it also
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gives the creditor a right to obtain
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an interest from the llc
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and it how it plays out differs between
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states but in colorado it's kind of like
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a wage garnishment except it's on
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the members distributions
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so it's essentially getting a
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garnishment of the llc
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members distributions that they would be
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entitled to
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so in other words let's say i've got ten
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thousand dollars of credit card debt
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that i
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legitimately racked up but i refuse to
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pay
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a creditor can get a charging order
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against me and my llc
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and now any distributions that i might
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have taken from my business
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the creditor is entitled to take those
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instead so it's like a wage garnishment
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where they're getting their hands on the
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money before
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it is able to get to me again it differs
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from state to state
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some states will um extend a charging
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order only to the llc members
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distributions
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some states will go a little bit further
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and give the creditor more of a right
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to step into the shoes of the llc member
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it differs depending on the state but
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that's the general concept of the
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charging order
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so let's compare that let's say um in
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that first example
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i spent that ten thousand dollars on my
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personal credit card and i'm refusing to
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pay it
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if i had done that shopping spree on my
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business
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credit card now i'm mixing i'm
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i'm muddying up that separateness
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between me
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and my business by using that credit
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card that's for business expenses
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for by using that to buy clothes for
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myself
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now i'm ruining that protective veil
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of limited liability and that's what
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might expose me to risk of piercing the
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corporate
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veil so i hope that uh makes sense i
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hope you guys are able to
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um grasp the difference between
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member liability for the llc or the
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corporation
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versus this concept that a
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a member and an llc can still have some
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shared liability because the the uh
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fight back the argument usually when i
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talk about
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piercing the corporate veil or avoiding
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the risks of
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a single member llc and when i talk
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about
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how to take these steps to protect your
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personal liability
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i get feedback and arguments saying no
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you can't no that doesn't work you can
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still always be responsible like the llc
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is still liable for a member debt
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blah blah blah and that's not that's not
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true
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um a llc even with a single member llc
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uh is still a good and viable
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way to protect your personal liability
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as a business owner it's not and it has
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never been
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a way to avoid actual
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legal obligations or responsibilities
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and that's what piercing the corporate
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veil
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is all about is making sure that we're
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not abusing
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the limited liability that an llc or a
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corporation
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gives us and that someone is still being
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held responsible for legitimate
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debts and so that's where piercing the
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corporate veil comes in
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is holding someone responsible for
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legitimate
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business debts versus charging orders
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where it's
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holding the member responsible for her
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legitimate
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personal debts and we're saying this
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business of yours
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is an asset just like your income or
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your wage might be
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and so this creditor has a right to get
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at it and attach it
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some way in order to collect their
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legitimate debts
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truly the moral of the story whether
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we're talking about piercing the
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corporate veil or
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charging orders or any of it the moral
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of the story
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is uh keep things separate between your
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business because even when um we're
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talking about charging orders
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you know we still want to maintain that
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idea of
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separateness but also just do good
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in your business be a good person in
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your personal life
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and piercing the corporate bail charging
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orders
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typically won't be a problem for you if
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you're not
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intentionally trying to avoid legitimate
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debts that you owe
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then a charging order is not going to be
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a concern of yours and if you're not
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using an llc to avoid
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legitimate liability to yourself or to
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wrongfully give yourself some additional
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protection
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from actual obligations that you have
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then it's not going to work
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if you want more info on this if you
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want to read a bit more about piercing
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the corporate fail or charging orders
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check my blog there's a link in the
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description i've gone into a bit more
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detail about it
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and then of course if you are in
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colorado if you're a business owner in
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colorado and you have
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concerns about your own personal
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liability or piercing the corporate bail
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um please feel free to contact me i'm
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happy to consult with you and chat and
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provide any help that i can
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that's all for this episode folks drop a
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comment below let me know what you think
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and again don't forget to check the
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description for
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links to download my free guide on how
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to pay yourself in a single member llc
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you can also check the link to visit my
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blog where i go into a bit more detail
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uh on this topic of piercing the
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corporate veil versus
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charging orders and and how those
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concepts apply
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to business ownership thank you all so
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much for watching
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i'm aiden durham and i'll see you next
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time
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you
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