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LLCs: Shield From Liability or Cloak of Deception?

August 31, 2011

It is a common misconception that the corporate form will somehow help an owner avoid liability for his own wrongdoing.  This is false.  Corporations (and later, LLCs) were designed partly to protect the owners from liability for the company’s debts.  However, the courts have long recognized that sometimes, it would be unfair, or unjust, to let those behind the company to escape responsibility.

Every state has its own rules for ‘piercing the corporate veil’ or for ignoring the corporate liability shield to hold owners, directors and officers liable for damage caused by the company in certain circumstances.   Wyoming is no different, and since that state’s business laws have received some attention lately, we will focus on Wyoming’s rules.

Wyoming has recognized that “statutes have created the legal fiction of a corporation being a completely separate entity which could act independently from individual persons.  If the corporation were created and operated in conformance with the statutory requirements, the law would treat it as a separate entity and shelter the individual shareholders from any liability caused by corporate action, thereby encouraging investment.”  Kaycee Land and Livestock v. Flahive, 46 P.3d 323 (Wyo 2002).  However, “when corporations fail to follow the statutorily mandated formalities, co-mingle funds, or ignore the restrictions in their articles of incorporation regarding separate treatment of corporate property, the courts deem it appropriate to disregard the separate identity and do not permit shareholders to be sheltered from liability to third parties for damages caused by the corporations’ acts.”  Id.

In Wyoming, LLC veil piercing factors have been reduced to: 1) fraud; 2) inadequate capitalization; 3) failure to observe company formalities, and 4) intermingling the business and finances of the company and the member to such an extent that there is no distinction between them.  Gasstop Two, LLC v. Seatwo, LLC, 225 P.3d 1072 (Wyo 2010).  None of these factors, of themselves, necessarily require the court to pierce the corporate veil.  Instead, the court will look to see if “an adherence to the fiction of the separate existence of the corporation would, under the particular circumstances, sanction a fraud or promote injustice.”  Kaycee.  In fact, the Wyoming courts have established a long list of circumstances which might justify holding the owner of a LLC or corporation liable.  These include, among other things, use of a corporation as a mere shell, concealment and misrepresentation of the identity of the responsible ownership, and the intent to avoid performance by use of a corporation as a subterfuge of illegal transactions.

The Wyoming State Legislature, and its Courts, have made clear that although the state welcomes legitimate business (indeed, they try to attract it), there is no tolerance for use of either corporations or LLCs for illegal or improper purposes.  It is a given that in business, anything can happen; profits can be made or lost, and people and businesses may be harmed by unfortunate economic circumstances, or even by poor business  management.  In such cases, the law protects the owners of companies as an inducement to keep contributing to the economic welfare of the state.  However, when someone deliberately uses a business in a way they shouldn’t, or for an improper goal, the owners may be liable for the company’s actions.  However, a smart business owner, with good advice and forethought, should be able to conduct business without the fear that he will be liable for the failure of the business.  The LLC or corporation should be a shield for liability, not a cloak of deception.

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