LLC liability and piercing the veil

ULLCA Status Rules: What Membership and Management Do Not Prove

ULLCA separates an LLC’s debts from the people connected with it, so the decisive question is what independent basis-if any-supports liability against the member or manager. ULLCA (2013) § 304 provides that an LLC’s debts, obligations, and liabilities, whether arising in contract, tort, or otherwise, are solely those of the LLC; a member or manager is not personally liable, directly or indirectly, solely by reason of being or acting as a member or manager.

That rule applies equally to members and managers. It does not matter that a member owns nearly all the interests, that a manager negotiated the transaction, or that either person performed the act for the LLC. The word solely does the work: status cannot be the only reason for the judgment.

A manager-managed LLC and a member-managed LLC may produce different authority answers, but they do not produce different § 304 shields. Management structure helps determine who may act for the LLC; it does not turn the LLC’s debt into the manager’s or member’s debt.

ULLCA (2013) § 301(a) separately provides that a member is not an agent of the LLC solely by reason of being a member. ULLCA (2013) contains no statutory ordinary-course or apparent-authority rule for LLC members or managers. Authority instead comes from agency law, the operating agreement, manifestations by the LLC, ratification, and any applicable filed statement of authority under § 302. Do not import the RUPA partner rule or the corporate director rules from the sibling chapter, Partner and director liability rules.

The authority question and the personal-liability question must be kept separate. An unauthorized member’s act may fail to bind the LLC, but that fact alone does not make the member personally liable. Conversely, an authorized manager may bind the LLC, while remaining protected from personal liability for the resulting company debt.

This is closed-book-you must be able to state § 304’s shield and § 301(a)’s agency limitation cold.

Independent Exposure: Separate the Signature, the Wrong, and the Shield

Run the ULLCA analysis in this order.

1. Identify the claimed obligation. Is the claimant enforcing an LLC contract, an LLC tort obligation, or some other debt? If the defendant is being sued merely because the LLC owes the obligation, begin with § 304.

2. Ask whether the defendant assumed personal responsibility. A member or manager may sign a guarantee, co-sign a note, promise payment in an individual capacity, or undertake another separate contractual obligation. The result turns on the instrument’s language and the capacity in which the person signed. A signature such as “Jordan Lee, Manager of Oak LLC” ordinarily signals representative capacity; “Jordan Lee, individually and as guarantor” creates a distinct personal undertaking.

3. Ask whether the defendant personally committed the actionable wrong. Section 304 does not immunize a person from liability for the person’s own fraud, conversion, negligent act, or other tort. The claimant need not pierce the entity to recover for that direct misconduct. The key fact is personal participation, not ownership or title. A member who personally makes a fraudulent statement may be directly liable even if the LLC is also liable; a member who merely owns the LLC is not liable merely because another person committed the wrong.

4. Ask whether another applicable law supplies liability. The LLC statute’s status shield does not eliminate a liability imposed by some other governing rule. But the answer must identify that independent rule; “the LLC did not pay” is not itself a personal-liability rule.

5. Only then consider veil piercing. If the claimant has no guarantee, direct tort, or other independent basis, the question becomes whether the entity should be disregarded for this claim.

The most common near miss is confusing authority with liability. Authority asks whether the LLC is bound by the person’s act. Personal liability asks whether the person is bound. A member may lack authority but still avoid personal liability; a manager may have authority but still receive § 304 protection.

Another near miss is confusing a personal guarantee with a veil-piercing claim. A guarantee enforces the person’s own promise and does not disregard the entity. Veil piercing reaches the person because the entity form was abused; it is not needed when the person already promised to pay.

Use the following sequence when the facts move from the LLC’s debt toward the individual:

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Veil Piercing: Control Must Become Abuse

Veil piercing is an exceptional remedy against a shareholder or LLC member. It does not decide whether the corporation or LLC first owes the debt; it decides whether the separate entity should also be disregarded for purposes of imposing that obligation on the owner.

The common formulation requires two connected showings:

1. Unity of interest and control. The owner and entity must be so closely identified, as to the transaction, that the entity lacks a genuinely separate existence.

2. Abuse producing inequity. The control must have been used to perpetrate a fraud, evade an existing obligation, circumvent a statute, or commit a comparable wrong, and respecting the entity would produce the inequitable result the doctrine is designed to prevent.

Courts describe the first requirement with factors such as commingling funds, treating entity property as personal property, failing to maintain records, ignoring separateness, siphoning assets, and using the entity as a shell. The second requirement supplies the necessary connection: the control or separateness failure must help cause the claimant’s unfair loss. A shareholder’s control, without misuse, is not enough. An LLC’s insolvency, without more, is not enough. Failure to pay a debt, without more, is not enough.

Corporate and LLC cases use substantially the same core inquiry, but the facts are weighed differently. Corporate formalities-such as meetings, minutes, and resolutions-may support separateness in a corporation. An LLC is ordinarily permitted greater organizational flexibility, so the absence of corporate-style meetings or minutes is generally weaker evidence and is not independently sufficient. But an LLC’s flexibility does not authorize commingling, asset siphoning, or using the company to defeat a known obligation.

Undercapitalization is also context-dependent. Thin capitalization alone ordinarily does not establish piercing. It becomes stronger evidence when the owner created or maintained the entity without a reasonable ability to meet foreseeable obligations and then used that undercapitalization as part of the abusive plan.

The doctrine’s near-miss distinction is control versus misuse. A sole shareholder or 99-percent LLC member has control, but control is only the first part of the inquiry. The decisive additional fact is use of that control to cause the inequity-for example, transferring the entity’s assets to the owner for no consideration while a known creditor’s claim is pending.

A second near miss is direct wrongdoing versus piercing. If an owner personally lies to a creditor, the owner may be directly liable for that lie. If the owner uses the entity as the instrument to conceal assets or evade a debt, the creditor may seek veil piercing. The labels matter because direct liability rests on the owner’s own wrong, while piercing extends responsibility for an entity obligation.

Piercing is ordinarily claim-specific, not an automatic declaration that the owner is liable for every debt the entity has ever incurred. The consequence is that the owner may be held responsible for the particular entity obligation whose enforcement would otherwise produce the demonstrated inequity. The entity remains liable as well.

One Worked Item: The Asset Transfer That Changes the Result

Harbor LLC is manager-managed under its operating agreement. Rita owns 90 percent of Harbor’s membership interests but is not its manager. Harbor borrowed $200,000 from First Bank on a promissory note naming Harbor as the borrower; Rita signed only “Rita, member of Harbor LLC” and did not sign a guarantee. Before Harbor defaulted, Rita used Harbor’s account to pay her personal bills and transferred nearly all of Harbor’s assets to herself for no consideration. First Bank can prove that the transfers left Harbor unable to pay the note.

Three Liability Tests: Status, Direct Acts, and Entity Abuse

High-Yield Points - ⚡ Biggest Takeaways

Apply ULLCA § 304 unless a guarantee, personal wrong, other law, or veil piercing supplies an independent basis. Under ULLCA § 301(a), membership alone creates no agency; authority and personal liability are separate questions. Veil piercing requires control joined to misuse that causes the claimant’s inequitable loss.