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Friday, August 24, 2012

Owner of Construction Company Escapes Large Jury Verdict Piercing the LLC

In a recent case out of the Chesterfield County Circuit Court, a jury entered a sizeable verdict against the owner of a construction limited liability company that breached a contract with the plaintiff homeowners. The jury determined that the homeowners were entitled to “pierce the corporate veil” of the limited liability company and hold the owner personally responsible for damages caused by his company, notwithstanding the limited liability protections afforded by law. The trial Judge subsequently set aside the jury verdict, ruling that the homeowners were not permitted to pierce the corporate veil of the company since the owner was not the “alter ego” of the company. The main piece of evidence upon which the plaintiff homeowners relied was a single check paid directly to the owner in connection with the construction project (as opposed to his company). The trial Judge ruled that this evidence alone was insufficient to demonstrate that the owner was the “alter ego” of the company. For business owners, this case demonstrates the importance of maintaining corporate formalities. In Virginia, a corporate entity can be disregarded (and the owners held personally liable for the debts/obligations of the entity) if the unity of interest and ownership is such that the separate personalities of the entity and the individual no longer exist and to adhere to that separateness would work an injustice. C.F. Trust, Inc. v. First Flight Ltd. P'ship, 266 Va. 3 (2003). To maintain the appropriate legal separateness, business owners should always do the following (which list is not intended to be all-inclusive): • Register the legal entity in all states where it is doing business, and maintain/update the state registrations. • Maintain a separate bank account for the legal entity and deposit all entity receivables into the entity’s account. Do not co-mingle personal funds and entity funds. • File appropriate tax returns for entity and separate personal tax returns. • Identify legal name of entity on website, business cards, and all advertising materials. If you are using business tradenames which are different from the legal name of the entity name, register those tradenames in the jurisdictions where they are being used. • Identify the legal entity on all contracts and only execute contracts as an agent for the entity. The attorneys at Gross & Romanick, P.C. have significant experience organizing business entities and assisting their clients in adopting financial, marketing and contractual policies that will protect the integrity of the limited liability form. We can help you ensure that the corporate veil of your entity will not be pierced.