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I am one of 3 members in a Delaware LLC, which was properly…

i am one of 3...
i am one of 3 members in a Delaware LLC, which was properly formed and has not been run improperly (meaning no personal assets are intermingled, it has its own bank account used only for the LLC's expenses, etc.). about $150,000 of our capital has been invested in the LLC. The purpose of the business of the LLC is to generate ongoing income for the members, and we intend to distribute virtually all income monthly (assuming that is possible). we have not started generating any income as of yet though.
It has recently come to our attention that there are legal trolls pursuing class action lawsuits against businesses like ours. While we haven't been sued or even approached, the question is, "would income that we've already distributed to members be safe from liability"? in other words, are the current assets of the LLC the only assets that potential plaintiffs can go after?" Given that we plan to distribute income regularly (and spend it), we want to make sure that income is not subject to liability, or if it is, under what circumstances. Thanks.
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Answered in 5 minutes by:
7/9/2017
Ray
Ray, Lawyer
Category: Legal
Satisfied Customers: 48,207
Experience: 30 years in civil, probate, real estate, elder law
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Hi and welcome to JA. Ray here to help you today.Please bear with me a few moments while I review your question and respond.

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Thats correct that only the assets here of the LLC can be sought if there was any judgment against the LLC. Any distribution have left the LLC and are not vulnerable to such a suit down the road.Making the distributions regularly when you get to that point is a good idea, it actually makes the LLC less a target in my mind by keeping the LLC account down lower here.

You have the right idea to lower potential liability by lowering the assets in the name of the LLC in this situation.

I appreciate the chance to help you today.Thanks again.

If you can positive rate 5 stars it is much appreciated.

Ray
Ray, Lawyer
Category: Legal
Satisfied Customers: 48,207
Experience: 30 years in civil, probate, real estate, elder law
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Customer reply replied 1 year ago
Hi Ray, thanks for the answer. The only thing that doesn't make sense to me is that if that is true, it seems like an incentive for people to do things that they know are potentially an issue (such as violating the CAN SPAM act and spamming users' emails, for example), generate a bunch of income from doing so into an LLC, and distributing that income out so that it's "protected". What am I missing here? Thanks

It is real hard to sue and collect agsint an LLC, usually they close down the LLC and start a new one.By keeping assets in the bank low real easy to trnasfer funds and leave a shell LLC with say $5 balance and start a new LLC elsewhere with new account.

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Customer reply replied 1 year ago
Hi Ray - that doesn't quite answer my follow up question. Let me slightly alter/rephrase it. What's to stop someone from making $100MM in income (using an LLC structure) by violating a law, pulling that income out as it comes in, and generally leaving only $5 in the LLC account at any given time as you say? Is the only recourse for plaintiffs to sue the LLC which has $5 in assets? I mean, I guess they can sue for future income, but what about the $100MM already pulled out? Seems like there must be ways for them to go after the members of the LLC, since they took that ill-begotten income and enjoyed its benefits. Is there not?

They could try for personal liability here but it is unlikely to be successful.Thats why LLCs are so popular.They are in many ways a house of cards and can be folded if necessary.I do a lot of nursing homes ,they are totally paper companies, they rent the home from landlord, if the state comes after them or somebody sues for millions they loot the account and let it go.It folds up here and they set up again as a new legal entity.It may not seem fair but it it is legal.Its a lot like Chapter11 business bankruptcy, Mr. Trump here has done it multiple times and never missed a beat.It is also why corporate lawyers make so much.

Thanks again.

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Customer reply replied 1 year ago
sorry to keep asking follow-ups here, but you said that "they could try for personal liability here but it is unlikely to be successful". why is that? what needs to happen to "pierce the LLC veil"?

They would have to show fraud here, rathe than a normal distribution of funds.If the LLC held millions an dsitributed in a day and then folded it maybe fraud and piercing the veil.

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he corporate veil is not unique to Delaware. The corporate veil is a legal concept “that separates the personality of a corporation from the personalities of its shareholders, and protects them from being held personally liable for the company's debts and other obligations.”

The corporate veil is essentially the concept that maintains corporate law throughout the world. Without the ability to act as its own entity, how else could companies transact business? The idea of a corporation or LLC acting as a separate entity and limiting the liability of the shareholders is what allows the business world to function.

The importance of the corporate veil in Delaware cannot be understated. Delaware possesses stacks of legal doctrine stipulating the separation of a corporation from its shareholders. This distance between investors and the corporations in which they have invested is what permits investors—aka shareholders—to feel comfortable in investing.

Delaware courts have been very reluctant to allow the piercing of the corporate veil. If a corporation is sued, its shareholders typically will not be held liable.

Piercing the corporate veil is defined as a situation in which a court decision puts aside limited liability and hold a corporation's shareholders or Board of Directors personally liable for the corporation's actions or debts.

Any Delaware corporation that is qualified to do business in another jurisdiction (through Foreign Qualification) can fall back on Delaware law structure; that is, a Delaware company can rely on the world-famous case law of the Delaware Court of Chancery in the case of any litigation.

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Customer reply replied 1 year ago
is showing fraud the *only* way they can successfully go after personal assets?

Pretty much Delaware has cases where they have refused here, thats why they are so popular for LLCs

In 2014, Cornell Glasgow, LLC vs Nichols demonstrated the Delaware Court of Chancery’s position where the Court recognized that closely held entities, such as the defendant's Delaware LLC, are under the complete control of their owners, and emphasized "that's why people form closely held entities, to cabin their exposure under contracts."

If contracting parties do not avail themselves of the frequently-used contractual protections — personal guarantees, security agreements and the escrowing of assets — then they cannot expect the Court of Chancery to hold owners personally liable by seeking to pierce the corporate veil.

The concept of the corporate veil is quite significant in any jurisdiction, but since Delaware remains the destination for start-up corporations and LLCs in the United States due to the Court of Chancery’s extensive case law on the subject.

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Customer reply replied 1 year ago
ok thanks!

Bye for now have a great Sunday.

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