The North Carolina Limited Liability Company Act protects LLC members from liability for the actions of the LLC. N.C.Gen.Stat. § 57C-3-30(a) provides:
A person who is a member or manager, or both, of a limited liability
company is not liable for the obligations of a limited liability
company solely by reason of being a member or manager or both, and does
not become so by participating, in whatever capacity, in the management
or control of the business.
However, it is still possible for a member to incur liability, as noted in the final sentence of subsection (a): A member or manager may, however, become personally liable by reason of his own acts or conduct.
The act does not, however, go on to define what sort of "acts or conduct" would cause a member or manager to become personally liable. Litigants have sought to apply the traditional veil-piercing factors for corporations as a guide to piercing the liability protections of the LLC; and in some cases, have sought to use them as precedent.
Of course, such an approach misses the obvious: an LLC is not a corporation. They are different types of business entity altogether. Just because the courts can look past a corporation's liability protection under certain circumstances, it does not automatically follow that those exact same circumstances should cause an LLC member to lose liability protection.
For one, the traditional "adherence to formalities" factor is not nearly the issue for LLCs that it is for corporations. This makes sense, as the legislature, in enacting the LLC act, sought to offer entrepreneurs and business owners a simpler, more manageable type of entity that, unlike a general partnership, could still afford liability protection. If "failure to adhere to formalities" were to be adopted in any type of veil-piercing test by the courts, doing so might well run afoul of the legislative intent behind the Act. Surely this factor would be hard to implement as any kind of general factor in an LLC veil-piercing analysis. While some LLCs could have significant formalities built into their operating agreements, it is not clear how any such provisions could be invoked by an outside party suing the LLC.
In the next part of this article, I will review some of the other traditional corporate veil-piercing factors, and examine their applicability to LLCs.
However, it is still possible for a member to incur liability, as noted in the final sentence of subsection (a): A member or manager may, however, become personally liable by reason of his own acts or conduct.
The act does not, however, go on to define what sort of "acts or conduct" would cause a member or manager to become personally liable. Litigants have sought to apply the traditional veil-piercing factors for corporations as a guide to piercing the liability protections of the LLC; and in some cases, have sought to use them as precedent.
Of course, such an approach misses the obvious: an LLC is not a corporation. They are different types of business entity altogether. Just because the courts can look past a corporation's liability protection under certain circumstances, it does not automatically follow that those exact same circumstances should cause an LLC member to lose liability protection.
For one, the traditional "adherence to formalities" factor is not nearly the issue for LLCs that it is for corporations. This makes sense, as the legislature, in enacting the LLC act, sought to offer entrepreneurs and business owners a simpler, more manageable type of entity that, unlike a general partnership, could still afford liability protection. If "failure to adhere to formalities" were to be adopted in any type of veil-piercing test by the courts, doing so might well run afoul of the legislative intent behind the Act. Surely this factor would be hard to implement as any kind of general factor in an LLC veil-piercing analysis. While some LLCs could have significant formalities built into their operating agreements, it is not clear how any such provisions could be invoked by an outside party suing the LLC.
In the next part of this article, I will review some of the other traditional corporate veil-piercing factors, and examine their applicability to LLCs.
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