Hiding Behind the Corporate Veil?

I own a business that performed services for a company. The company was actually a one-man operation. Shortly after we completed our work, that company filed for bankruptcy. They owe us over $15,000 now. The company was always just operated by one person and I think he was the company’s only employee. I think he had to know when we did the work that he might be heading for bankruptcy. It is early to tell, but it looks like there will be little to no assets to divide in the bankruptcy proceedings and the company has other creditors after it. Is there any way I can collect my money from the owner of the company directly? I believe the company was an LLC.

Generally, if a limited liability company (“LLC”) or similar business structure exists, it is difficult to target the personal assets of the owner(s) to satisfy a debt. As with most general rules in the practice of law, nonetheless, there are exceptions to this broad proposition as well.

The terminology that a lawyer may use is “piercing the corporate veil” or establishing an “alter ego.” What is meant by these phrases is that in order to collect from an owner personally, one must show that the business structure at issue was essentially synonymous with—or the “alter ego”—of the owner.

Courts will consider a variety of factors in making this determination. A discussion of the extent of all these factors and related principles is beyond the scope of this article. Regardless, to provide an indication of what courts consider, several factors will be used for illustrative purposes.

For example, a court would look at whether the individual was mixing or “commingling” company funds with his own personal monies. This may suggest that personal funds were being placed in the LLC solely to avoid liability.

Courts will also consider whether other corporate formalities were followed such as generating meeting minutes and completing proper filings with the state of Kansas. Another common factor is whether the company was underfunded or “undercapitalized” at its formation.

Of course in your situation, I am sure the owner was also the sole person making the decisions impacting the company and this is a factor also considered.

In conclusion, the answer to the question is that LLCs and similar business structures usually act to shield the owner(s) from liability. Under certain circumstances, however, the corporate veil may be pierced and the owner(s) may be required to answer for the debts of the company where the company is merely an “alter ego” of the individual.

In your case, it looks like you are warranted in ensuring that you are protected in the bankruptcy and by exploring additional options as well. Hopefully you are able to recoup some or all of the amount that your company is owed.