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Lane
Lane, JD, CFP, MBA, CRPS
Category: Tax
Satisfied Customers: 10152
Experience:  Law Degree, specialization in Tax Law and Corporate Law, CFP and MBA, Providing Financial & Tax advice since 1986
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I was a member of a 3 person now defunct Florida LLC. Can

Customer Question

I was a member of a 3 person now defunct Florida LLC. Can the Franchise Tax Board of California levy my personal assets and bank account to collect taxes from this LLC ? They have already levied the bank account of this LLC that had a few hundred dollars in it. They are demanding a return from 2010 and an amount around $7000. I am curious if they can go after the individual members.
Submitted: 1 year ago.
Category: Tax
Expert:  Lane replied 1 year ago.
Hi,
THey cannot IF you followed the LLC law to the letter.
Not following the law and doing things that allow them to "pierce the corporate veil" will allow them to attach your personal assets.
Corporations and LLCs are legal entities, separate and distinct from the people who create and own them (these people are called corporate shareholders or LLC members). One of the principal advantages of forming a corporation or an LLC is that, because the corporation or LLC is considered a separate entity (unlike partnerships and sole proprietorships), the owners and managers have limited personal liability for the company's debts (INCLUDING tax debts).
And like any other creditor, they'll have to get a judgment to do it.
Here's an excellent list of the things that can cause the corporate veil to be pierced by a court, from the attorneys at NOLO.com"
Courts might pierce the corporate veil and impose personal liability on officers, directors, shareholders, or members when all of the following are true.
There is no real separation between the company and its owners. If the owners fail to maintain a formal legal separation between their business and their personal financial affairs, a court could find that the corporation or LLC is really just a sham (the owners' alter ego) and that the owners are personally operating the business as if the corporation or LLC didn't exist.
For instance, if the owner pays personal bills from the business checking account or ignores the legal formalities that a corporation or LLC must follow (for example, by making important corporate or LLC decisions without recording them in minutes of a meeting), a court could decide that the owner isn't entitled to the limited liability that the corporate business structure would ordinarily provide.
The company's actions were wrongful or fraudulent. If the owner(s) recklessly borrowed and lost money, made business deals knowing the business couldn't pay the invoices, or otherwise acted recklessly or dishonestly, a court could find financial fraud was perpetrated and that the limited liability protection shouldn't apply.
The company's creditors suffered an unjust cost. If someone who did business with the company is left with unpaid bills or an unpaid court judgment and the above factors are present, a court will try to correct this unfairness by piercing the veil.
In my professional experience the most common cause for the elements above to be considered is that commingling of company and personal assets.
Then simply not being compliant, again, with the state's LLC laws, formalities, etc. (registering with the secretary of state, etc.)
If the company NEVER had enough funds to operate (what the court would call undercapitalizaion) can always be an issue.
Luckily, LLC's don't have the stringent recordkeeping requirements of the corporation, such as minutes of meetings, creating (and following those bylaws) ... BUT if you had an operating agreement for the LLC and didn't follow it, that can be a problem (and to a lesser extent NOT having an operating agreement can be used as another evidence of this not being a separate formal business).
From a real-world perspective, CAFTB may not got to the trouble and expense of doing the things that WOULD allow the piercing of that veil.
One of which would hiring acquiring representation in your state and filing the require notice, etc.
Sorry for the data-dump here, but the only real answer to your questions is ... it depends.
IF you did a good job of dotting the I's and crossing the T's you're probably bullet proof ... If not, then this will be a cost-benefit issue for the board.... and MAY not be worth the cost of pursuing.
Let me know if you have questions ...
Lane
Expert:  Lane replied 1 year ago.
Hi,
… just checking back in to see how things are going.
Did my answer help?
Let me know…
Lane

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