IS A MEMBER LIABLE FOR THE ACTIONS, DEBTS OR LIABILITIES OF A LIMITED LIABILITY COMPANY?
April 10, 2018
Many businesses in Missouri operate as limited liability companies. A limited liability company, often called an “LLC,” is a simple business structure that combines elements of a corporation, a partnership, and a sole propriety, but with unique characteristics.
The owners of an LLC are called “Members.” An LLC can be managed by a Manager or its Members. A key aspect of an LLC lies within the name itself: “limited liability.” In essence, the Members of an LLC are not liable for the debts, obligations, and actions of the company itself. In Missouri, this protection against liability is provided for by statute (RSMo. § 347.057). This statute provides that a member or manager of an LLC is not liable for any debt or obligation, whether arising under contract or tort law, solely by being a member or manager.
Missouri courts have expounded upon this statutory protection, noting that “[l]imited liability companies are ordinarily considered separate legal entitles that are distinct from their members or owners.” Hibbs v. Berger, 430 S.W.3d 296, 306 (Mo. App. 2014); see also Hammett v. Atcheson, 438 S.W.3d 452, 461 (Mo. App. 2014).
However, the protection of “limited liability” of LLC members “is not absolute.” Id. “Where a corporation [or an LLC] is used for an improper purpose and to perpetuate injustice by which it avoids its legal obligations, equity will step in, pierce the corporate veil and grant appropriate relief.” Id.(citing Irwin v. Bertelsmeyer, 730 S.W.2d 302, 304 (Mo. App. 1987)).
In determining whether to “pierce the corporate veil” and hold a member liable for the actions and obligations of the LLC, Courts require the complaining party to satisfy the following three-pronged test:
1. The member must have “[c]ontrol, 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. That control “must have been used by the defendant [member] to commit fraud or wrong, to perpetuate the violation of a statutory or other positive legal duty, or dishonest and unjust act in contravention of the [complaining party’s] legal rights; and
3. That control and breach of duty must be the cause of the complaining party’s alleged loss or injury.
“Put succinctly, if a member of an LLC has complete control of the company and uses that control to commit a wrongdoing that proximately causes an injury, then the individual member will be held liable for the LLC’s debts.” 66, Inc. v. Crestwood Commons Redevelopment Corp., 998 S.W.2d 32, 40 (Mo. Banc 1999); see also State ex. rel. Family Support Division v. Steak’m and Take’m LLC, 524 S.W.3d 584, 593 (Mo. App. 2017).
Not surprisingly, determining whether the actions of an LLC member subject him or her to personal liability is a difficult task. While Missouri Courts apply the three-pronged test, each particular situation is unique and often subject to multiple interpretations.
Determining whether the actions of an LLC member can subject the member to personal liability is a complex task. The attorneys at Pospisil Swift LLC have considerable experience in determining the likelihood of personal liability on the part of LLC members. If you or someone you know has a question as to the potential personal liability of an LLC member, please contact Pospisil Swift LLC by reaching out to Mike Pospisil (816.895.9105) or Matt Swift (816.895.9107).
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