March 18, 2018
Sunday PM

It may be that a limited liability company might have some benefit for a business that has 50 or 500 investors, but under ordinary circumstances such a business entity would adopt the corporate form of business organization. For a closely-held business, one owned by one or a handful of members, the limited liability company (LLC) is an absolute piece of worthless junk. I do not care who tells you otherwise. The intent of a limited liability company is to eliminate personal liability for what the business does, to keep you from being sued or held liable for business obligations. There is no possibility, none, zero, that an LLC will protect you in this way. All that paperwork will be instantaneously shredded, and you will be held liable for all business obligations. That is a statement of fact in the state of Alaska, and generally overall in the United States.

To get through an LLC, or a corporation for that matter, to get to you and to hold you liable for the business’s debt or dishonesty is called “piercing (or lifting) the corporate veil.” What that means in practical terms is punching a hole through your silly paperwork and going straight for your throat in the course of taking everything you own, if necessary, for satisfaction. In the state of Alaska you do not even need a lawyer or a judge to do that; any number of bureaucrats are authorized to “pierce the corporate veil” as it suits them in the conduct of their duties.

Under the provisions of Alaska law a limited liability company (LLC) will not protect you from personal liability.

So how come everyone else says otherwise? In a lot of instances it is because they are statistically referred to as “low information” individuals who do not read what is readily available to read on the subject. In a lot of other instances this stuff is being marketed just to make money from fools. These Nigerian scams are ultimately more honest in that they do not pretend to be anything more than a scam. There is a lot of money in this, thousands of dollars in fees for each case is easily possible.

Pop up the internet and at your fingertips you will find hundreds of websites fortuitously telling you of the marvelous abilities and magical qualities of an LLC. Were you to bother to flip a few pages forward in most instances you will also find application forms to fill out for a fee, and they will help you become an LLC.

This extract comes from Get.Smarter.com, which really has no desire for you to be smart, yet is actually more honest than almost all of the others. It’s still a complete lie, but they actually do include a qualifier:

The compelling reason to set up an LLC instead of operating as a sole proprietor or forming a partnership is to have personal financial protection. Financial obligations of the LLC typically don’t impact individual owners, unless one or more owners are deemed liable in a lawsuit or financial matter.

In other words an LLC protects you from liability only to that point in time when that liability is challenged, then you are toast. It is in fact a confession of the worthlessness of the LLC right in the sales pitch. (But buy one from us anyway.)

To illustrate to you the complete failure of an LLC to protect you from liability in the state of Alaska the “compelling” case is Alaska Workers’ Compensation Appeals Commission, Decision No. 175, dated January 8, 2013; a remand order (or reversal) on appeal in the case of Titan Enterprises, LLC, Titan Topsoil, Inc., CCO Enterprises, LLC, and Todd Christianson vs. State of Alaska, Division of Workers’ Compensation. The reversal is the Commission thinks the penalty amount (in dollars) is excessive and is returning it to the Board for further consideration. All other aspects of the case are affirmed.

What is interesting about this case is one of the primary uses of the LLC in this region is in the construction industry for the purpose of avoiding the payment of insurance and workmen’s compensation. This creates a situation in which the “gyppos” can outbid the honest contractors because they have basically reduced their labor costs by half.

The way this game is played is for one LLC to contract for the work, but then hire all its employees from another LLC, and somehow thereby one magically avoids all liability for injury or anything else that might happen. It is all nonsense. The case of Titan Enterprises, LLC, et. al settles that question beyond any doubt whatsoever. Duly note this is a case being decided inside the bureaucracy; no lawyers or judges are necessarily involved. “In the second, final decision, the board, among its rulings, ordered Titan, Titan Topsoil, Inc., CCO Enterprises, LLC, and Christianson, without distinguishing between them, to pay a civil penalty in the amount of $6,392,601, .....”.

On page 11, “Under Alaska law, if a corporation is a “mere instrument” of a sole shareholder, it is permissible to “pierce the corporate veil” and hold the shareholder personally liable for the corporation’s financial obligations.” The Board found that these businesses were all “mere instrumentalities” of Christianson. “Having done so, the board proceeded to “pierce the corporate veil” to hold Christianson personally liable for the civil penalty it imposed.”

On page 12, “Piercing the corporate veil is a common law doctrine. If certain factors are present, the board has the authority to apply the doctrine and impose personal liability on the shareholder. The factors are whether:

a) The shareholder sought to be charged owns all or most of the stock of the corporation; b) the shareholder has subscribed to all of the capital stock of the corporation or otherwise caused its incorporation; c) the corporation has grossly inadequate capital; d) the shareholder uses the property of the corporation as his own; e) the directors or executives of the corporation act independently in the interest of the corporation or simply take their orders from the shareholder in the latter’s interest; and f) the formal legal requirements of the corporation are observed.”

“In one case, the Alaska Supreme Court observed: “It is not necessary for all six factors to be satisfied before instrumentality can be found,” but the factors help the fact-finder to decide whether the evidence favors piercing the veil. Moreover, another supreme court case recognized the possibility that instrumentality could be found on the basis of only two out of the six factors being proven.”

It does not even take a judge or a lawyer to “pierce the corporate veil” of a closely-held LLC or corporation; a bureaucrat can do it. The LLC is not worth the paper it is written on; it is junk, and it won’t protect you from anything. The state of Alaska will show you no mercy.

Nor will the Feds. “In the United States, corporate veil piercing is the most litigated issue in corporate law.” From the Supreme Court of California, “The equitable owners of a corporation, for example, are personally liable.....when they provide inadequate capitalization and actively participate in the conduct of corporate affairs.” And the IRS “has made use of corporate veil piercing arguments and logic,...,” and “the IRS has achieved multiple high-profile court victories.”

LLCs are junk. They were invented to do something they do not do, can never do with closely-held organizations, and that is protect you from personal liability. No organizational form can protect you from personal liability, but no other organizational form claims that ability. The IRS treats an LLC as a sole proprietorship, a partnership, or a corporation; there is no separate filing for an LLC.

All over the country right now bank loan officers are telling people to form LLCs when they go into the rental business or that business or this. Bank loan officers are not qualified to address issues of business organization. I am qualified to do so. So I do not know why they do it, to impress, because they have all watched the same nonsense seminar on the internet, I really do not know. But they are doing everyone a disservice by pretending to know something they do not, and the consequences can obviously be very expensive; millions of dollars worth of expensive.

The Alaska Housing Finance Corporation (AHFC), according to reports I have received, insists upon an LLC or a Subchapter S corporation before they will loan money for rental apartments in rural areas. If it is the only way to get the money, I guess we will form an LLC, but that LLC is bogus in that it will never protect you from personal liability.

Rather than telling you the truth I should be selling this stuff to you like hotcakes as so many others are doing. But I adhere to an older code that says “I do no harm to my client’s financial position.” Charging anyone money for this stuff is unethical under this older code, to which I still personally adhere.

In business there is only one practical way to protect yourself from liability: Buy insurance.

Save yourself misery, save yourself money, and stay away from the junk that is an LLC. Use all that money, otherwise wasted, to buy yourself some good insurance.

And please note, I don’t sell insurance.

David G Hanger, EA, MBA
Ketchikan, Alaska

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The text of this letter was NOT edited by the SitNews Editor.

Received March 15, 2018 - Published March 18, 2018

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