Limited Liability

Limited Liability

A Legal and Economic Analysis

Stephen M. Bainbridge and M. Todd Henderson

The modern corporation has become central to our society. The key feature of the corporation that makes it such an attractive form of human collaboration is its limited liability. This book explores how, by allowing those who form the corporation to limit their downside risk and personal liability to only the amount they invest, there is the opportunity for more risks taken at a lower cost.

Chapter 8: Veil piercing in unincorporated entities

Stephen M. Bainbridge and M. Todd Henderson

Subjects: law - academic, corporate law and governance


Limited liability is not unique to corporations; since 1977, entrepreneurs could achieve limited liability through the use of limited liability companies (LLCs), as well. Not surprisingly, but, as we show, regretfully, where limited liability went, piercing followed. In this Chapter, we consider several flavors of LLC statutes, showing how the language varies on the question of whether investors in the LLC (known as members) would be liable for the debts of the LLC. But, we show how courts generally disregard the language, and pierce the LLC veil on grounds quite similar to those used to pierce the corporate veil. We look closely at cases in which plaintiffs try to disregard the LLC’s separate existence, styled both as veil piercing claims and as enterprise liability claims. Our survey of the relevant cases demonstrates that courts do no better in LLC cases than they do in corporate cases, and, in fact, do much worse in many cases. This is because courts sometimes pierce the LLC veil, even when it is not specifically authorized by statute or even seemingly forbidden by it. In addition, courts apply the same corporate formalities tests to LLCs that they use for corporations, notwithstanding the fact that one of the chief benefits of LLCs is that it enables businesses to operate with less formal governance provisions. Finally, we offer a normative view on LLC veil piercing. The rules encourage inefficient investment in irrelevant precautions, while encouraging expensive and complex litigation. They may discourage capital formation in small businesses by exposing those businesses to a disproportionate share of the burden from the tort liability system, which in turn under mines the valuable economic and democratic contribution of small business ownership and entrepreneurship. If veil piercing is to be retained in the LLC context, courts should to realize that piercing the veil threatens the very purpose of an LLC and thus is a subject to be approached with caution. In applying the conclusory and vague standards, courts should fairly convincing proof of all the factors that they are assessing before piercing the veil.

You are not authenticated to view the full text of this chapter or article.

Elgaronline requires a subscription or purchase to access the full text of books or journals. Please login through your library system or with your personal username and password on the homepage.

Non-subscribers can freely search the site, view abstracts/ extracts and download selected front matter and introductory chapters for personal use.

Your library may not have purchased all subject areas. If you are authenticated and think you should have access to this title, please contact your librarian.

Further information