Limited liability companies, like other corporate entities, are treated as entities separate from their owners.
Generally, this structure protects an LLC’s owner from having his or her personal assets at risk to satisfy the debts or liabilities of the business.
However, a recent Milwaukee County Circuit Court decision serves as a reminder that neither an LLC nor any other business structure will necessarily shield business owners if they are negligent in the performance of their business operations.
Further, an LLC or other corporate form can be ignored, and “pierced” through to individual owners, if the business is treated not as a separate entity but as a personal instrument of its owners.
In the Milwaukee County case, an electrical fire at a rental property killed two people.
A lawsuit was later brought against the limited liability companies that own the property and directly against the LLC’s owner in his individual capacity.
During the litigation, investigations disclosed that the landlord had a reputation for failing to keep his rental properties up to code.
In addition, numerous code violations existed at the apartment where the fire occurred.
Investigators found no evidence that the owner ever pulled a permit to fix the issues at the building, despite the legal obligation to do so.
The landlord further testified during a deposition that he could not recall if he had made repairs or if he had hired anyone to do so.
The owner also stated that he did not recall the full names of anyone who may have made repairs and that he did not keep any records of repairs being made.
The court entered a $1,000,000 judgment against two of the owner’s real estate companies.
The judgment covered negligence, pain and suffering, and the tenants’ wrongful death.
The court also entered a $350,000 judgment personally against the property owner.
The court did so after finding that the owner/landlord’s companies were fictitious and existed primarily for fraudulent purposes.
The court noted that the companies had no corporate documents or business records.
In addition, the companies often made payments directly to family members without records showing any legitimate business purpose.
This case highlights the important requirement that corporate entities, including LLCs, always maintain corporate formalities.
These include creating and adhering to operating agreements or bylaws, keeping records of corporate activities, and holding and recording regular and special meetings regarding corporate business.
They also include making all required governmental filings.
Perhaps most critically, entities should maintain separate financial accounts and records for the companies and their owners’ personal financial activities.