Your LLC Is Getting Sued. Here’s Why You Need an Attorney

Business owners tend to overestimate the extent to which Limited Liability Company’s (LLC) can shield their personal assets from liability in cases involving alleged wrongdoing. While best practice very well may be to open an LLC, an opposing party with a strong case against you and your business can still pose a substantive risk to both your personal and professional assets.

To be sure, an LLC designation can protect a large or small business owner from personal liability for a business’s debts. However, you are only protected if the court recognizes the LLC as a legitimate, separate entity that adheres to its fiduciary duties. If not, the court could pierce the corporate veil and you could be found individually liable for the business’s actions. 

In this article, learn how our business attorneys in Colorado will help you avoid personal liability when the protections of your LLC fall short. 

You risk undermining the protection of your LLC if you do not separate yourself from your business's assets and liabilities. Such direct involvement isn’t illegal by itself. It becomes problematic when the LLC is involved in negligent or fraudulent financial activities. According to the Colorado Limited Liability Company Act, courts can find business owners liable for the LLC’s debts and obligations if there is sufficient evidence that the legal distinction between the two is blurred. 

This action is known as “piercing the corporate veil.” C.R.S. 7-80-107

The following activities can appear suspicious to a court considering this measure: 

• Lack of separate business operations

• Commingled funds and assets

• Inadequate record-keeping

• Thin capitalization

• LLC use for non LLC-related activities 

If the court decides to pierce the corporate veil, your personal assets can be at risk. 

Piercing the corporate veil means that a court looks past the structure of the LLC, and the LLC and its owner are no longer considered separate legal entities. As a result, the owners personal assets are no longer beyond the reach of a lawsuit. Your personal assets, held in your individual name, things like your car, your personal bank account, or even your house may suddenly be at risk if a judgment enters against your business.

Note: Depending on the size of your company, you may not be the only one on the hook for the actions of your LLC. Officers, directors, and managers implicated in the alleged activity and their presumed influence on company operations could also be held personally liable. 

Piercing of the corporate veil is considered an “extraordinary remedy” that courts apply in limited circumstances. Colorado case law further supports that it’s the aggrieved party’s burden of proof to convince the court it’s necessary to invoke this extraordinary legal remedy. 

Retaining a business attorney as soon as possible will give you the best chance of avoiding piercing the corporate veil. 

Our business law attorneys provide strategic legal advice for business owners facing legal problems. You can expect to provide some or all of the following types of primary evidence to formulate a strong defense: 

• Colorado LLC operating agreement and any amendments or restatements

• Meeting minutes of all member and/or manager meetings

• Annual filings with the Colorado Secretary of State’s office

• Copies of all business contracts, leases, and other legal documents

• Federal and Colorado LLC tax filing requirements for the LLC and its owner

• Statements for business and personal lines of credit 

• Detailed business accounting records, from the general ledger to cash flow statements

• Documentation of a distinct business address and contact information

• Business cards, website, signage, and other marketing materials for LLC

• Payroll records, contracts, and HR records for LLC employees

• Copies of business insurance policies (ex. Liability, professional, property)

Our business attorneys will use their expertise to advise you on what documents are necessary and how to procure them as needed. We aim to present enough evidence that demands a verdict in your favor. The following are a few possible ways to defend against these claims.

Any opportunity to prove that the LLC is not a thinly-veiled cloak for the owner to conduct business from beneath is worth our pursuit. 

For this defense, we would focus on three primary types of evidence: 

• The LLC observed corporate formalities

• The owner kept personal finances separate from the LLC

• The LLC served a purpose different from the owner’s distinct persona 

Another defense to protect you from potential liability involves challenging the assertion that you used the LLC for wrongdoing. Colorado law requires a showing that the corporate form was abused to commit fraud, promote personal interests, or defeat creditors’ claims. 

If we can demonstrate the LLC was not misused, you have a stronger case that lifting the corporate veil is unwarranted. 

Possible evidence includes:

• documents showing financial solvency at the time of transfer

• legitimate business purposes for transfers

• publicly filed disclosures

With the right evidence, our business attorneys can argue that holding you personally responsible for the LLC’s debts is simply unfair. 

That’s because achieving equity is central to recognizing a fair and just outcome in cases that seek to remove the company veil. The attorney could argue that holding the owner personally liable would be unfair, especially if the owner was acting in good faith. 

Hypothetical Case: Fraudulent Conveyance

Fraudulent conveyance is when a debtor transfers assets to avoid creditors. These cases depend on how aggressively a creditor pursues payment. Fraudulent transfers aren’t automatically voided. Thus, it’s up to the creditor to take legal action in order to change it.  Creditors can pursue various legal remedies through court orders to satisfy the debt. C.R.S. 38-8-108

In a case that hinges on little to no separation between the LLC and the owner and evidence that the allegations of wrongdoing are credible, we wouldn’t be trying to disprove the action your creditor is trying to pursue. Rather, a defense would likely focus on showcasing those acts that demonstrate any transfer was a legitimate act and not an attempt to avoid a creditor. For instance, we would want to show the court evidence of new separate accounts, business loan restructuring, corporate debt restructuring, properly disclosing past transfers, updating operating agreements, and retaining sufficient assets to obtain business debt relief.

If the trial court decides that piercing the corporate veil is appropriate, you can appeal to reverse veil piercing.

New evidence cannot be used on appeal, but other options are available, such as: 

1. the court overlooked evidence that proved you adhered to corporate formalities. 

2. the trial court improperly applied legal standards

3. the legal conclusions do not align with established case law. 

Our business representation attorneys are here to help keep the court from lifting the corporate veil based on accusations made by a disgruntled client. With Robinson & Henry, you can count on our business attorneys to guard your company’s corporate shield, refining our approach based on the allegations you face. Call 303-688-0944 to begin your case assessment.