LLCs versus Corporations

LLCs & corporations are built on the shared tenet that as the U.S. Supreme Court stated in Dole Food Co. v. Patrickson, 538 U.S. 468, the corporation & its shareholders are distinct.

Besides less emphasis on required formalities, however, courts generally apply the same rules to LLC piercing as corporate piercing. Yet, in California, LLCs have some advantages over corporations from an asset protection perspective including greater privacy for the LLC members & complex procedures to recover assets from the LLC. Corporations Code § 17302. LLCs are not secure against creditors who obtain a changing order which is a lien on a debtor-member’s “assignable interests.” By default, the LLC statute provides that, unless the Operating Agreement has a contrary rule, a membership may be assignable only if the majority of members not transferring their interest consent to the assignment.

See NetJets Aviation, Inc. v. LHC Communications, LLC (2d Circuit, 2008) 537 F.3d 168; California Corporations Code § 17301, subd. (a)(1).

Protection of owners for corporate liabilities is not absolute. For example, if an owner signs a guarantee for the corporations or LLC’s performance, and the bizniz fails to perform, the owner may be liable on the guarantee. If the owner was personally involved in a tort (or wrongdoing) they may be liable, for example, if an owner was driving a corporate car on corporate bizniz, the mere fact they were on a corporate errand does not shield the owner from liability in a auto accident lawsuit. These are not true exceptions because in these instances the owners is not held liable not because of what the corporation or LLC did but because of what they did personally

A more complicated true exception to ownership protection from liabilities is alter ego doctrine, also known as “piercing the corporate veil.”