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MaintainYourLLC Articles and Resources

How to Set Up Single Member LLCs

by | Dec 26, 2021 | , , , ,

You must be very careful when you are the only owner of your LLC. Single member LLCs require extra planning and special language in the operating agreement.

One example: What happens when the single owner/member passes? Who takes over? It may be months before that is sorted out, and your business will falter without a clear leader.

Difficulties of Owning a Single Member LLC

You want the asset protection benefits of a limited liability company. But what if you don’t want any partners? What if you want to be the sole owner of your own LLC?

You can do that with a single owner LLC (sometimes known as a single member LLC).

But you have to be careful.

Before we discuss how to properly set up and use a single owner LLC we must acknowledge a nationwide trend. Courts are starting to deny sole owner LLCs the same protection as multiple member LLCs. The reason has to do with the charging order.

The charging order is a court order providing a judgment creditor (someone who has already won in court and is now trying to collect) a lien on distributions. A chart helps to illustrate:

Illustration showing typical multi-member LLC structure

John was in a car wreck. Moe does not have a claim against XYZ, LLC itself. The wreck had nothing to do with the duplex. Instead, Moe wants to collect against John’s assets, which is a 50% interest in XYZ, LLC. Courts have said it is not fair to Mary, the other 50% owner of XYZ, to let Moe come crashing into the LLC as a new partner. Instead, the courts give Moe a charging order, meaning that if any distributions (think profits) flow from XYZ, LLC to John then Moe is charged with receiving them.

Moe is not a partner, can’t make decisions or demands, and has to wait until John gets paid. If John never gets paid, neither does Moe. The charging order not only protects Mary but is a useful deterrent to frivolous litigation brought against John. Attorneys don’t like to wait around to get paid.

But what if there is only a single owner?

Illustration that shows a single member LLC structure

In this illustration there is no Mary to protect. It’s just John. Is it fair to Moe to only offer the charging order remedy? Or should other remedies be allowed?

How the Court Has Ruled Against LLCs With One Member

In June of 2010, the Florida Supreme Court decided the Olmstead vs. FTC case on these grounds. In a single owner LLC there are no other members to protect. The court allowed the FTC to seize Mr. Olmstead’s membership interests in order to collect. Other states have followed the trend.

Interestingly, even two of the strongest LLC states have denied charging order protection to single owner LLCs in limited circumstances.

In September of 2014, the US District Court in Nevada decided the bankruptcy case of In re: Cleveland.

The court held that the charging order did not protect a single member LLC owner in bankruptcy. Instead, the bankruptcy trustee could step into the shoes of the single owner and manage the LLC. This is not surprising since bankruptcy trustees have unique and far reaching powers, which are routinely upheld by the courts. (But know that, incredibly enough, a bankruptcy trustee can’t get control of the shares of a Nevada corporation. This is a special planning opportunity available to Nevada residents – or those who may become Nevada residents.)

In November of 2014, the Wyoming Supreme Court rendered a surprising verdict in the Greenhunter case.

The court held that the veil of a single owner LLC could be pierced. The issue centered on a Texas company’s use of a Wyoming LLC it solely owned. The LLC was undercapitalized (meaning not enough money was put into it) and it incurred all sorts of obligations. It wasn’t fair for the Texas company for the single owner to hide behind the LLC. The fact that a single owner LLC was involved was a material issue. The court pierced through the LLC and held the Texas company liable for the LLC’s debts.

Even though these are fairly narrow cases, both Nevada and Wyoming have held against single member LLCs. Again, this is the trend.

Luckily there are some things you can do to protect your assets as a single member LLC…

Strategies for Protecting Your Assets

One strategy is to set up a multi-member LLC structured in a way that gives the intended single member all of the decision making power. For example, parents can have adult children over 18 become member(s) or for those under 18 you can use a Uniform Gift to Minors Act designation. You may want to use an irrevocable spendthrift trust for children or others. A local estate planning attorney can help you set these up correctly.

But what is the smallest percentage you have to give up for the second member? Could you give up just 1/100th of 1 percent? Most practitioners feel that the percentage should not be inordinately low and that 5% is a suitable second member holding. So the ideal structure would be that John owns 95% of the LLC and the other 5% is owned by a child (or other family member) and/or an irrevocable trust.

Accordingly, in a state that doesn’t protect single owner LLCs, you have an excellent argument for charging order protection. There is a legitimate second member to protect. To further that legitimacy it is useful to have the second member participate in the affairs of the LLC. Attending meetings and making suggestions recorded into the meeting minutes is a good way to show such involvement.

But what if you don’t want to bring in a second member?

There are plenty of good reasons to set up a sole owner LLC. Other owners can bring a loss of privacy and protection. And if you paid 100% for the whole asset, why should you bring in another member anyway? Or, what if you don’t have any children or other family members that you want to bring in?

If a single member LLC is truly the best fit for you, there are three key factors to know and deal with.

1. The Corporate Veil

Many states’ LLC laws do not require annual meetings or written documents. Some see this as a benefit but it is actually a curse.

If you don’t follow the corporate formalities (which now apply to LLCs) a creditor can pierce the veil of protection and reach your personal assts. With a single owner LLC this is especially problematic. Because you are in complete management control it may appear that you aren’t respecting the entity’s separate existence or that you are comingling the LLC’s assets with your own personal assets. Without a clear distinction of the LLC’s separate identity, a creditor could successfully hold you personally responsible for the debts of the LLC (as they did in Wyoming’s Greenhunter case above.) Maintaining proper financial books and records and keeping LLC minutes can help demonstrate a definitive and separate identity for your single owner LLC. You must work with a company which appreciates the importance of this for single owner LLCs.

2. Different State Laws

LLC laws vary from state to state. Some states offer single owner LLCs very little protection. The states of California, Georgia, Florida, Utah, New York, Oregon, Colorado and Kansas, among others, deny the charging order protection to single owner LLCs.

Other states offer single owner LLCs a very high level of protection in traditional circumstances. So we have to pick our state of formation very carefully. In order to deal with this trend against protection, we use the states that do protect single member LLCs.

Wyoming, Nevada, Delaware, South Dakota and Alaska (collectively “the strong states”), have amended their LLC laws to state that the charging order in standard collection matters is the exclusive remedy for judgment creditors – even against single owner LLCs.

So how do we use these state laws to our advantage? Let’s consider an example:

A chart showing a properly structured single member LLC

In this example, John owns a fourplex in Georgia and a duplex in Utah. Each property is held in an in-state LLC (as required to operate in the state). The Georgia and Utah LLCs are in turn held by one Wyoming LLC. (This structure works in every state except California, which requires extra planning. Be sure to take advantage of our free 15-minute consultation if you are operating or residing in California).

I break down potential lawsuits into two different types of attacks: Attack #1, the inside attack and Attack #2, the outside attack.

In Attack #1, the inside attack, a tenant sues over a problem at the fourplex owned by GEORGIA, LLC. They have a claim against the equity inside that LLC. Whether GEORGIA, LLC is a single owner or multi-owner LLC doesn’t matter. The tenant’s claim is against GEORGIA, LLC itself. Importantly, the tenant can’t get at the assets inside UTAH, LLC or WYOMING, LLC. They are shielded since the tenants only claim is against GEORGIA, LLC.

The benefit of this structure comes in Attack #2, the outside attack. If John gets in a car wreck, it has nothing to do with GEORGIA, LLC or UTAH, LLC. But, the car wreck victim would like to get at those properties to collect on the judgment. If John held GEORGIA, LLC and UTAH, LLC directly in his name, the judgment creditor could force a sale of the fourplex and duplex since neither state protects single owner LLCs.

However, since John is the sole owner of WYOMING, LLC he is protected by Wyoming’s strong laws. The attacker can only get at WYOMING, LLC and gets a charging order, which means they have to wait until John gets a distribution and therefore could possibly never get paid. If John doesn’t take any distributions, there’s no way for the attacker (or his attorney) to collect. A strong state LLC offers a real deterrent to litigation, even for single owner LLCs.

3. Operating Agreement

Like bylaws for a corporation, the Operating Agreement is the road map for the LLC. While some states don’t require them, they are an absolute must for proper governance and protection. A single owner LLC operating agreement is very different than a multi-member operating agreement. 

For example, if a single owner transfers their interest in the LLC, inadvertent dissolution of the entire LLC can occur. This is not good. Or, again, what if the sole owner passes? Who takes over? Our Single Member Operating Agreement provides for a Successor Manager (a person you pick ahead of time) to step in.

The best way to deal with these issues, as well as others, is to have a specially drafted operating agreement to properly govern your Single Member LLC. Corporate Direct provides such a tailored document for our clients. When it comes to business and investments, you must do it the right way.

Distributing LLC Money

by | Dec 10, 2020 | , , ,

You’ve set up your LLC. Now it’s time to make money, and flow the profits into your bank account. It’s time to think about how you will be distributing LLC Money between bank accounts. In the example we’ll use in this article, you have transferred title in a real estate rental property (a duplex) into your new LLC, which is called XYZ, LLC. You have also, as is required to follow the corporate formalities, set up a bank account in the name of XYZ, LLC. You haven’t hired a property management company yet as you are going to try managing the property yourself.

In the first month, your two duplex tenants pay the rent on time. You are thinking to yourself: “This is good. This is how it’s supposed to work.” You deposit the rent checks, which are properly made out to XYZ, LLC, into the new XYZ, LLC bank account. You have a mortgage and trash pick-up payment to make, so you write two checks against the new LLC bank account to cover those obligations.

Glory be, after those payments, at the end of the month you have a profit! What do you do?

You could pull some of the money out, transferring it from XYZ, LLC to your personal account, knowing that you’ll have to pay taxes on a portion of it at some point. More likely, you may leave the money in XYZ, LLC and build up a reserve of cash to be able to cover any unforeseen issues. Some owners may leave the money in the LLC account until near the end of the year. After speaking with their CPA to understand how much income is sheltered by depreciation and how much tax they’ll owe they will pull enough money out of XYZ, LLC to pay their tax obligation, if any, as well as take a profits distribution for themselves at the end of the year.

Things are working well and you decide to invest in another rental property, a fourplex. You’ve heard that by putting your new fourplex into XYZ, LLC you are creating a target rich LLC. If a tenant at the duplex sues XYZ, LLC for a faulty condition they could not only reach the equity in the duplex but also in the new fourplex. They have a claim against the LLC and on an inside attack they can get what is inside XYZ, LLC, which would be both the duplex and fourplex. You don’t want to do that.

So you set up ABC, LLC to take title to the fourplex. Following what you did with XYZ, LLC you set up a new LLC bank account for ABC, LLC and deposit tenant checks made out to that LLC into the new ABC, LLC bank account.

Along the way you come to appreciate that the state in which ABC, LLC and XYZ, LLC were formed offers weak asset protection for the outside attack. The inside attack, where a tenant sues the LLC directly, offers the same protection in all states. But the outside attack where, for example, a car wreck victim has a personal claim against you and is suing from the outside to get at your assets, varies from state to state. California, New York and Utah are weak states. The car wreck victim and their attorneys can get at your valuable real estate to satisfy a claim. Wyoming, Nevada and Delaware are strong states featuring charging order protection, which is briefly described in this short video. For more detail, see my book, Loopholes of Real Estate.

LoopholesRE Sutton.Front Cover.Final .HiRes .2019
For now, we want you to focus on distributing LLC money through this new structure. As before, the new holding LLC we form in Wyoming opens its own bank account under the name Padre, LLC.
How to Properly use LLC Bank Accounts

 The profits you generate from the two title holding LLCs on the top line will, whenever you want, be distributed to the new Wyoming holding LLC. We don’t want to directly distribute to your personal bank account moneys from XYZ, LLC and ABC, LLC because you don’t personally own them anymore. Instead, you own Padre, LLC, which in turn owns XYZ, LLC and ABC, LLC. So the money flows from XYZ, LLC and ABC, LLC to Padre, LLC. Whenever you want to take a distribution you will take it from Padre, LLC, which is the entity you directly own. XYZ, LLC and ABC, LLC are technically owned by Padre, LLC and not you. But that is good, because it provides excellent asset protection when a strong state is used. As well, Padre, LLC is a good place to hold money because it is asset protected in Wyoming. If you hold the money in your personal bank account you are not as protected.

Some people will complain that in the structure example above, a total of three bank accounts is not needed. Two points are critical here. First, it is useful to know that with online banking and fairly low minimum balance requirements the use of three separate accounts is neither burdensome nor expensive. Second, and more importantly, by not using separate bank accounts you run the risk of a creditor seeking to pierce the veil of your entity. You must not commingle money between personal and separate business accounts. There must be a clear line of money flows from duplex tenants into XYZ, LLC, from that entity into Padre, LLC and from the Wyoming holding LLC into your personal bank account. You cannot skip a step and risk being held personally liable for a claim.

Again, distributing LLC money correctly is not going to be a burden. And even if it was it is required for you to maintain your asset protection edge, so just do it. Work with your CPA on the timing of distributions and payment of taxes and all will be fine.

Besides, it’s how everyone else does it anyway.

The Crimes of a Nominee Officer

by | Aug 28, 2020 | , ,

Matt wanted to open a confidential mail order business and he needed to operate with absolute privacy. No one could ever know that he ran a business that sold sensitive supplement products over the internet. Matt lived in Las Vegas and knew he needed a Nevada LLC for his new business. He had heard that the state of Nevada allowed both corporations and LLCs the use of nominee officers, whereby someone else’s name, a nominee, was used for all the state filings. In this way, privacy was achieved because Matt’s name would not be listed on the Nevada Secretary of State’s website as an LLC manager. No one could ever, he believed, find out about the new business. Matt’s friend told him there was a formation company in a nearby strip mall that set up LLCs for privacy. Matt made an appointment. The gregarious salesman explained to Matt how it worked. Their company provided an individual to serve as nominee manager. This person’s name was listed on the Annual List of Managers filed with the state. Once that was done the LLCs owner, Matt, then held a meeting and elected a new manager – Matt, to manage the business. Matt liked the privacy involved and paid a significant amount of money for the formation company to proceed. The nominee’s name was listed with the state and then Matt, signing the meeting minutes prepared by the formation company, named himself the real manager for the upcoming year. Matt got the business going. As the sole owner of the LLC he was a cosigner on the bank account. His in-house bookkeeper could sign checks up to $2,500. Anything above that amount required only Matt’s signature. In many cases where he didn’t want his name to appear, he paid the bills with cashier’s checks. The business grew. In the second year, when the Annual List to the state was due, the formation company prepared minutes that took Matt off as manager, put the nominee in as manager for the filing with the state and, once the filing was done, put Matt back in charge. Matt came to realize that he didn’t like the high fees the formation company charged for the nominee service. So before the third year’s filing was due he obtained a new registered agent. This essentially terminated his relationship with the formation company. Matt didn’t want to be bothered with all the minutes and managers being changed back and forth so he just left the nominee’s name on as manager and filed the Annual List with the state of Nevada. Matt assumed that the formation company would never know otherwise. It was just a name. Then disaster hit. Matt’s sensitive supplement products caused a number of heinous injuries to honest, doubt-free individuals. The online reviews indicated that many were in need of significant medical attention. Matt was confident he could beat this. He instructed his new registered agent company to dissolve the LLC. With the business shut down there would be nothing to go after, thought Matt. It would all blow over. But that is never the case when a large number of innocent people are injured. A government attorney was assigned the case. Using Nevada law, she went to the registered agent’s office and requested the names of the owners and managers. The registered agent was reluctant to turn it over until they learned that in a criminal case they were required to turn over such information. Learning of the investigation, Matt finally hired an attorney. Jerry set Matt straight on a number of legal issues. Selling untested compounds to the general public was one issue. But Matt’s misuse of the nominee service provided the government with an even easier case against him. Jerry clarified Nevada law with Matt. When the manager of an LLC (or the officer of a corporation) resigns, an amended list of managers should be filed with the state. Each time they annually switched managers around they ran afoul of Nevada law. Jerry told Matt that the formation company had provided him with inaccurate information. Matt was angry, which Jerry noted was a common experience when relying on non-lawyers to provide legal advice. Jerry said there was a wrinkle in all of this. If Matt had simply left the nominee on as manager for the whole year, with Matt serving as assistant manager and doing all the work, no filing problem would have occurred. It is perfectly acceptable to list someone as a nominee officer. It was the changing back and forth without notifying the state that caused the problems. Filing false reports with the state of Nevada can result in significant penalties. In this case the false filings were doubled. First, the Annual List was filed under a knowing falsehood. The nominee was listed as manager but would be replaced in days without proper notification. (Again, you are better off leaving the nominee as the manager.) Second, in later years, Matt listed the nominee as manager without paying the formation company for the nominee service. He used a name of a nominee who clearly was not acting as a nominee. Matt knowingly submitted a false report to the state.
Nevada corporate law (at NRS § 78.150(3)(a)(2)) and LLC law (at NRS § 86.263(3)(a)(2)) requires the lists to include a declaration under penalty of perjury that the corporation or LLC “acknowledges that pursuant to NRS 239.330, it is a category C felony to knowingly offer any false or forged instrument for filing with the Office of the Secretary of State.”
A category C felony requires a court to sentence a wrongdoer to state prison for not less than one year with a maximum term of five years. Monetary fines may also be imposed.
Nevada law further states in § 78.150 and § 86.263 that a person who files a list with the Secretary of State which identifies an officer, director, manager or managing member “with the fraudulent intent of concealing the identity of any person or persons exercising the power or authority…in furtherance of any unlawful conduct is subject to the penalty set forth in NRS 225.084.”
The penalty for filing a false statement of material fact includes actual damages (involving a minimum of $10,000 for each violation), costs of suit and attorney’s fees and punitive damages as the facts may warrant. Jerry represented Matt as the government investigated both the untested supplement issues and the LLC filing issues. In the end, the government didn’t want to deal with all the experts and time required to prove the supplement case. Matt had clearly done all the LLC filings with the intent of improperly concealing his identity. The government’s case was so easy. Jerry did his best, but as it turned out, Matt was sent to prison for five years and owed millions in actual and punitive damages.

Be very cautious when using a nominee service.

Do not blindly accept the advice of those who don’t know the law. Leave your nominee on the annual list and work as an assistant manager or vice president. When the nominee is no longer used, file an amended list with the state. If you use the nominee’s name but you don’t pay for the service you can be charged with a felony and sent to prison. If you use a nominee to conceal your involvement in wrongful conduct the penalties are significant. It is easy to follow the law. It is also easy to avoid the advice of people who don’t know the law. Now that you know what not to do, here are some points to help you understand how and why you would use a Nominee Manager/Officer.
  • Nominee Manager / Officer can be used to provide privacy on state records. Each jurisdictions business statutes determine what information is made part of the public record, so this can vary depending on the state your entity is formed in.
  • Once a Nominee Manager/Officer is in place, the Member/Shareholder retains all operational authority, signature rights over any financial accounts, the right to enter any sort of financial or lease arrangement with any other entity, etc.
  • Agreement is signed between Member(s) and Nominee that outlines the parameters of the service.
  • Members/Shareholders retain the ability to vote the nominee officer out of the corporation if you so choose. Any state records that name the Manager, etc., must then be updated to show who is the current Manager/Officer/Director.

Black Swan Events and Force Majeure Clauses

by | Mar 1, 2020 | , , ,

Force Majeure is a French term meaning superior force. It is also a contract clause that relieves parties from performance when an extraordinary event occurs. Such challenges, known as ‘black swan’ events or generically ‘Acts of God’, may be mitigated by a force majeure clause acknowledging that contracts can’t be fulfilled when issues are outside of everyone’s control.

Did the Coronavirus arise from bat soup in a filthy, fetid wild animal market? Or was it accidentally leaked from China’s national biology lab in Wuhan? It doesn’t really matter. It is a superior force that was not foreseeable. (Although some would argue that with so many novel infectious diseases arising over the last 20 years, epidemics should now be expected).

With that last thought in mind, going forward, you should work with your attorney to include specific force majeure provisions in your contracts. A well drafted clause may excuse performance during events that are beyond the reasonable control of the parties. These can include acts of terrorism, labor shortages and strikes, new government regulations, fire and floods. Events such as epidemics, pandemics, biological outbreaks and wide spread illness should now also be incorporated into force majeure clauses.

What if your current contract does not include such language or the event doesn’t trigger a force majeure clause? Your fall back position is the doctrine of “frustration of purpose.” This doctrine can excuse contractual performance if events have now made it impossible to perform, or the central purpose of the contract has been frustrated due to unforeseeable events. However, Courts do not favor upending contracts under this doctrine. You are better off relying on a well drafted force majeure clause.

It is interesting to note that a Chinese agency is issuing force majeure certificates to local companies unable to perform on their contracts due to the Coronavirus challenge. It would be nice to just wave a certificate and make all the issues go away. But in the United States and other common law countries, force majeure is a question of fact for the Court. Was the event reasonably foreseeable? Were any notice provisions complied with? Does prior case law shed any light on the current situation? These are all facts to be considered. A government certificate won’t work here.

Still, your Chinese counterpart is probably struggling even more than you are. Is litigation even advisable? And if so, could you even collect?

The bigger issue for everyone is to understand the nature and need for force majeure clauses in your contracts. Well, that and the need for alternate sources of supply outside of China.

Are Individuals Protected Within Their LLC?

by | May 1, 2019 | , , ,

New Texas Case Sends Shock Waves

LLCs are set up to make personal assets inaccessible for any obligations of the entity. Protection may be lost, however, if you are not aware of your personal conduct when managing business through your LLC. The case below deals with water and environmental issues, an area where governments like to hold individuals liable.

In State v. Morello, the Texas Supreme Court recently found that an agent or a member of an LLC can be found personally liable for any violation of statutes or regulations.

In Morello, the State of Texas brought a civil action under the Texas Water Code against both Bernard Morello and his single member entity, White Lion Holdings, LLC (White Lion).

In 2004, Morello purchased a piece of property that was subject to a hazardous waste permit and compliance plan under the Texas Commission of Environmental Quality (TCEQ). After the purchase, Morello assigned the TCEQ compliance plan and all other property interests from his own name into White Lion.

In hindsight, Morello should have first taken title in the LLC, as he would have removed his individual name from the chain of title. Once your name is associated with the title to environmental problems, you can be held personally responsible for the remediation and cleanup.

Over time, the obligations were not performed, and the state decided to press charges against both White Lion and Morello for violating the TCEQ compliance plan.

The state’s argument for targeting Morello as an individual rested on section 7.102 of the Texas Water Code stating that any “person who codifies, suffers, allows, or permits a violation of a statute…within the [TCEQ’s] jurisdiction…shall be assessed” civil penalties.

Morello’s argument depended on a section of the Texas Business Organizations Code which states that, “a member…is not liable for a debt, obligation, or liability of a limited liability company.”

Morello eventually worked its way up to the Texas Supreme Court. The high court ultimately ruled in favor of the State, writing that “the State’s position is not based on the Business Organizations Code; it is based on the Water Code.” The Texas Supreme Court also found Morello personally liable on three primary arguments.

First, the Court found no reason whatsoever to exclude an individual from the term “person” from section 7.102. Second, the Court found that White Lion being the sole owner and being solely responsible for the compliance plan was immaterial. Third, the Court cited cases stating that a corporate agent may not escape individual liability where that agent “personally participated in the wrongful conduct,” citing that Morello’s actions were in his capacity as an agent and member of White Lion.

The Court’s opinion stated that where a statute applies to any “person,” an “individual cannot use the corporate form as a shield when he or she has personally participated in conduct that violates the statute.”

Haven’t We Seen This Before?

Federal and state courts have consistently rejected the position that where an environmental statute applies to a “person,” corporate officers can avoid individual liability for violating a statute if they personally participated in the wrongful conduct:

Riverside Mkt. Dev. Corp. v. Int’l Bldg. Prods., Inc., 931 F.2d 327, 330 (5th Cor. 1991) (concluding that the federal act “prevents individuals from hiding behind the corporate shield” when they “actually participate in the wrongful conduct”)
U.S. v. Ne. Pharm. & Chem. Co., 810 F.2d 726, 745 (8th Cir. 1986), cert. denied, 484 U.S. 848 (1987) (“[I]mposing liability upon only the corporation, but not those corporate officers and employees who actually make corporate decisions, would be inconsistent with Congress’ intent to impose liability upon the persons who are involved in the handling and disposal of hazardous substances.”)
T.V. Spano Bldg. Corp. v. Dep’t pf Natural Res. & Envtl. Control, 628 A.2d 53,61 (Del. 1993) (concluding that the State could impose personal liability on an officer who “directed, ordered, ratified, approved, or consented to the improper disposal”)
People ex. Rel. Burris v. C.J.R. Processing, Inc., 647 N.E.2d 1035, 1039 (Ill. App. Ct. 1995) (“[C]orporate officers may be held liable for violations of the [state environmental act] when their active participation or personal involvement is shown.”).

While these cases involved different statutes than the one at issue here, it is important to know that under an environmental regulation applicable to a ‘person,’ an individual cannot use the corporate form as a shield when he or she has personally participated in conduct that violates the statute.

And Morello was not held liable for a debt, obligation, or liability of White Lion as he asserts is prohibited by the Business Organizations Code. See Tex. Bus. Orgs. Code § 101.114. Rather, he was held individually liable based on his individual, personal actions.

The Morello case is groundbreaking and could have a ripple effect across Courts in the United States. It is important for people to be aware of their behavior when acting as a member or an agent of an LLC, even before the entity is formed. This recent Texas case demonstrates that in certain specific circumstances individual persons may be found personally liable for any wrongdoing.

Ted Sutton is a graduate of the University of Utah. He will be attending Law School at the University of Wyoming in the Fall of 2019.