Property owners commonly form limited liability companies (“LLCs”) for the purpose of developing, holding, or leasing investment or commercial properties. LLCs are used as the entity of choice due to their flexibility, ease of formation, and tax treatment. The thought behind holding the property in the name of the LLC, rather than in the name of the individual principal members of the LLC, is to insulate those individuals from possible liability associated with ownership of the property. It is common for individuals owning multiple properties to create separate LLCs with each property held by a different LLC. This strategy is intended not only to insulate the individuals from liability associated with ownership of the property, but also to insulate each property from the potential reach of creditors of the other properties.
However, in certain circumstances the liability protection afforded to the LLC may be “pierced” thereby allowing creditors of the entity to seek recovery directly from the assets of its individual members and managers. Specifically, liability protections granted to the members and managers of LLCs will not be recognized in instances where injustice, fraud, or the unjust avoidance of legitimate creditor claims exists. These protections may also not exist in the case where multiple or “disposable” LLCs are used to further the interests of a single real estate venture.
A recent article in the Colorado Bar Association Real Estate Section Newsletter provides members and managers of LLCs with some great insight regarding how Colorado and other courts have viewed the piercing issue.
If you would like more information regarding limited liability companies and not getting caught in the “disposable” loophole, please contact our Business Law Group partner, David A. Closson at [email protected].