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  1. #1

    Default Alter Ego Liability for a LLC

    My question involves business law in the state of: PA

    Alter Ego Liability
    "Alter ego" liability is a legal exception to LLC limited liability protection that arises when the LLC is managed in a way that fails to distinguish between the investors and the LLC itself. A court may invoke this exception in favor of a creditor and allow him to sue investors on an LLC debt if, for example, the LLC co-mingles LLC funds and the investors' personal funds, or if investors commonly withdraw money from the LLC's treasury for personal uses.

    I was hoping someone could give clarification on the above. Is the one person who is doing the wrongful actions liable or every investor? There is a second part, if one investor (partner) is taking money and it's not properly recorded and the LLC is audited by the IRS are all investors liable or just the person stealing money?

  2. #2
    Join Date
    Sep 2010
    Posts
    19,000

    Default Re: LLC Question - Alter Ego Liability

    It's not the case that the members of the LLC suddenly get sucked into a lawsuit such cases. What happens is that the plaintiff can sue the members directly (normally a corporation or even LLC would shield that) for whatever damages may have occurred. If the LLC isn't being operated as an independent entity AND the members are sued by the plaintiff, they may lose the LLC shielding. It still requires a preponderance of evidence that the defendant did something actionable. You don't get vicarious liability for being in business with someone who commits a tortious act unless you participated or knew about the act and had a responsibility to intervene.

    I'd recommend that:

    1. You don't go into business with crooks.
    2. You treat and insist that other members treat the business as a business.
    3. That you obtain legal advice on operating your business from somewhere OTHER than an internet bulletin board.

  3. #3
    Join Date
    Oct 2014
    Posts
    7,204

    Default Re: LLC Question - Alter Ego Liability

    Quote Quoting ACuriousMind
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    My question involves business law in the state of: PA

    Alter Ego Liability
    "Alter ego" liability is a legal exception to LLC limited liability protection that arises when the LLC is managed in a way that fails to distinguish between the investors and the LLC itself. A court may invoke this exception in favor of a creditor and allow him to sue investors on an LLC debt if, for example, the LLC co-mingles LLC funds and the investors' personal funds, or if investors commonly withdraw money from the LLC's treasury for personal uses.

    I was hoping someone could give clarification on the above. Is the one person who is doing the wrongful actions liable or every investor?
    That will depend on the particular facts of the LLC and its members. But certainly if one member is treating the LLC as though it were his own and the other members do nothing to stop it it may be that they'd all lose the limited liability protection of the LLC. There is no way to tell you exactly where the line might be drawn; the best practice is for the LLC members to ensure that everyone is acting in a way that respects the separate existence of the LLC.

    Quote Quoting ACuriousMind
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    There is a second part, if one investor (partner) is taking money and it's not properly recorded and the LLC is audited by the IRS are all investors liable or just the person stealing money?
    Again the details matter. Is the member taking money from the LLC, from a customer, or what? If it is from the LLC, is the member embezzling the money? If not embezzling it, what is his/her reason for taking the money out of the LLC? Bear in mind that a LLC that is treated as a partnership for federal tax purposes is not going to owe any tax itself. So the question becomes what effect the member's actions have on the income, deductions, and credits of the partnership because each member reports his/her share of the partnership's income, deductions, and credits on his/her personal return.

  4. #4
    Join Date
    Jul 2018
    Posts
    1,292

    Default Re: LLC Question - Alter Ego Liability

    Quote Quoting ACuriousMind
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    A court may invoke this exception in favor of a creditor and allow him to enter judgment against the members of an LLC debt. . . .
    ftfy


    Quote Quoting ACuriousMind
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    Is the one person who is doing the wrongful actions liable or every investor?
    A court may find that only one of multiple members (not "investors") is personally liable on an alter ego theory.


    Quote Quoting ACuriousMind
    View Post
    if one investor (partner) is taking money and it's not properly recorded and the LLC is audited by the IRS are all investors liable or just the person stealing money?
    Liable for what? Details matter.

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