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On September 4, 2019, Heather Rooney McBride was elected to fill the position of Chairperson for Maranatha Village, a retirement community in north Springfield. Heather is the first female and first businessperson to serve as head of the organization’s Board. Heather has served on Maranatha’s Board of Directors since 2014, and she has also served […]
Piercing the Corporate Veil and the Limit of a Limited Liability Company By: Mallory N. McDonald and Heather Rooney McBride Ordinarily, business entities, including limited liability companies (more commonly known as LLCs) are considered to be wholly separate from their owners. Hibbs v. Berger, 430 S.W.3d 296, 304 (Mo. App. E.D. 2014). Thus, a “member”, […]
Piercing the Corporate Veil and the Limit of a Limited Liability Company
By: Mallory N. McDonald and Heather Rooney McBride
Ordinarily, business entities, including limited liability companies (more commonly known as LLCs) are considered to be wholly separate from their owners. Hibbs v. Berger, 430 S.W.3d 296, 304 (Mo. App. E.D. 2014). Thus, a “member”, or owner, of an LLC is not held personally liable for the acts of a company solely based on the fact that her or she is a member of an LLC. RSMo. § 347.057 (2019). Hence, many business owners establish an LLC, or other types of business entities, in order to operate a business and limit their personal liability for the business’ operations. However, in business litigation, claims are sometimes brought whereby a party is asks the court to “pierce the corporate veil” so that the member(s) of an LLC or other entity can be held personally responsible for the entity’s debts.
The doctrine of piercing the corporate veil is rooted in equity. Hibbs at 309. Missouri courts recognize narrow circumstances in which the corporate veil can be pierced. Hibbs at 306. In order to pierce the corporate veil, the claimant must show that the member had: “(1) Control, not mere majority or complete stock control, but complete domination, not only of finances, but of policy and business practice in respect to the transaction attacked so that the corporate entity as to this transaction had at the time no separate mind, will or existence of its own; (2) Such control must have been used by the defendant to commit fraud or wrong, to perpetrate the violation of a statutory or other positive legal duty, or dishonest and unjust act in contravention of plaintiff’s legal rights; and (3) The aforesaid control and breach of duty must proximately cause the injury or unjust loss complained of.” Id.
Control is often easily established by showing that a member exercised complete control over an LLC’s finances and management. See State ex. rel. Family Support Division v. Steak’m Take’m, LLC, 524 S.W.3d 584 (Mo. App. W.D. 2017), John Knox village v. Fortis Const. Co., LLC, 449 S.W.3d 68 (Mo. App. W.D.), and Mobius Management Systems, Inc v. West Physician Search, LLC, 175 S.W. 3d 186, 188 (Mo. App. E.D. 2005). The mere aspect of having more than one individual possess decision-making authority does not defeat the element of control necessary for a piercing the corporate veil claim. Commonwealth Land Title Insurance Company v. Miceli, 480 S.W.3d 354 (Mo. App. E.D. 2015).
With regard to the “bad acts” element required for a claim of piercing the corporate veil, if a business owner is using a business entity, such as an LLC, to shield herself from the consequences of bad acts, then she can be held personally liable for the bad acts of the entity. Mobius Management Systems, Inc v. West Physician Search, LLC, 175 S.W. 3d 186, 188 (Mo. App. E.D. 2005). However, this element does not require an actual showing of fraud. Mobius Management Systems, Inc at 188. The corporate veil may be pierced when an entity is undercapitalized or stripped of its assets in order to avoid creditors. Id. Thus, where an LLC is undercapitalized and used as a “shell” to avoid debts, then the owner may be held personally liable for its debts. Id. This means appropriate capitalization and maintenance of financial records are necessary in order to limit the extent of a company’s and, in turn, its owners’ liability.
Lastly, to prevail on a claim to pierce the corporate veil, the claimant must be damaged by the wrongful acts of the LLC’s member. Hibbs at 306. Damages may be shown by a judgment that is obtained against an entity, only to discover that the entity was a shell. See Mobius Management Systems, Inc v. West Physician Search, LLC, 175 S.W. 3d 186, 188 (Mo. App. E.D. 2005). That said, it is not necessary that a judgment first be obtained in favor of the claimant in order to show that the wrongful acts caused harm. John Knox Village v. Fortis Const. Co., LLC, 449 S.W.3d 68, 76 (Mo. App. W.D. 2014).
Our corporate and business litigation attorneys are well versed in assisting companies and their owners to ensure they are utilizing best practices in order to avoid claims to pierce the corporate veil and in defending against piercing claims. If you are interested in establishing a business entity or wish to consult with an attorney regarding business litigation, please contact our office to schedule a consultation with one of our experienced business law attorneys.