The 1,2,3s of Asset Protection from Pennsylvania LLCs

To say there is an abundance of information online about Limited Liability Companies (LLC) is an understatement. With such great resources, why do many owner-operators have common problems? Whether going it alone or with a team by your side, it is important not to ever lose focus of the main value of an LLC: personal asset protection. That protection lasts only if the corporate veil stays intact. 

Now, wait a second. Who said anything about an old-timey word for curtains? What do curtains have to do with business anyway? 

Simple. A veil, or curtain, supplies concealment and protection from elements. The same concept is present to protect an LLC owner-operator's assets, at least to the extent that they follow corporate formalities. The corporate veil concept is the personal asset protection mechanism. While it is strong, it is not impenetrable. 

Piercing the corporate veil is a broader concept than many realize. Plus, in Pennsylvania, there is not a clear set of factors to define when a party can pierce the corporate veil. In Mortimer v. McCool, 255 A.3d 261 (Pa. 2021), the PA Supreme Court chose an “equitable powers” approach. This approach allows PA courts of all levels to evaluate the actions of owners to decide whether veil piercing is proper. This approach avoids setting out predictable factors and makes it tougher for owner-operators to avoid any specific conduct that could cost them the protection of their corporate veil. 

So while you cannot eliminate the odds that someone could pierce your LLC’s veil, you can do things to mitigate your risk. The three pillars of protection are 1. collect case law, 2. maintain formalities, and 3. capital control. While the first is out of an owner-operator’s control, there is no denying that the other two pillars are not only within your control: they are also best business practices for LLCs. 

Maintaining corporate formalities is easy. Keep all business and personal assets separate. And proper levels of insurance for your business. And keep accurate records. All things a healthy business does daily. Capital control for an LLC is an important sub-set of corporate formalities. It is important to adequately fund your LLC and to avoid treating it like a personal piggy bank. Again, both practices a healthy business would adopt. So where does that leave LLC owner-operators? As case law collectors. 

In Mortimer, the Court adopts a “geological accumulation” of case law to guide their equitable powers approach for veil piercing. The lack of precedent is unsettling. The decision makes keeping a watchful eye on veil piercing cases part of the path to understanding veil piercing, which in turn leads to a collection of precedent. As the number of cases grows, more elaborate guidance will evolve. In the meantime, follow best business practices. Take action to mitigate the potential of veil piercing by running a healthy business.

If you have questions about your business and asset protection, give us a call at 724-550-6970.

*Disclaimer: this article is for informational purposes only. It is not providing legal advice. It does not create an attorney-client relationship.