A Legal and Economic Analysis
AbstractLimited 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.
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