PIERCING THE VEIL: TRADITIONAL CORPORATIONS VERSUS LIMITED LIABILITY COMPANIES

Jerry L. Furniss
University of Montana

ABSTRACT

Courts historically have allowed a traditional corporation’s veil to be pierced only if
certain conditions are met. Some of the elements typically analyzed include such factors as
whether corporate formalities were respected, whether business and personal funds of
shareholders were commingled, and whether the corporation was properly capitalized. The issue
arises, with the proliferation of limited liability companies (LLCs) created in recent years,
whether the same tests should or can be applied to these LLCs in cases involving a potential
piercing of the limited-liability veil. LLCs have similar characteristics to corporations, in that they
can be undercapitalized and a potential commingling of funds can occur, but differences also
exist.
For example, most state statutes allow LLCs to operate without a formal structure –
including no requirement for company resolutions, no requirement for a board of directors, and
no requirement for a formal officer structure–which is in stark contrast to the formality
requirements imposed on traditional corporations. This study examines which of the factors courts
analyze in determining whether the limited-liability protection afforded to members of LLCs
should be pierced.

Keywords: Traditional corporations, limited liability companies, members, protection, LLCs Versus
traditional corporations