A recent Iowa Court of Appeals case illustrates that limited liability is not an “automatic” benefit conferred upon business owners when creating an LLC. Specifically, the Iowa Court of Appeals determined that while business owners may set up a new entity (e.g. LLC), creation alone is not the only factor a court will assess when determining whether a business owner may be personally liable. In rendering its opinion, the Court identified six different factors a court may consider when determining whether to hold a business owner in an LLC personally liable:
Factors that would support such a finding include [whether] (1) the corporation is undercapitalized; (2) it lacks separate books; (3) its finances are not kept separate from individual finances, or individual obligations are paid by the corporation; (4) the corporation is used to promote fraud or illegality; (5) corporate formalities are not followed; and (6) the corporation is a mere sham.
Keith Smith Co. v. Bushman, 873 N.W.2d 776 (Iowa Ct. App. 2015)
While no one factor is determinative, these factors illustrate various characteristics an Iowa court will consider in determining whether to “pierce the corporate veil” and hold a business owner personally liable. The Bushman case is yet another important reminder that while formally establishing an LLC is a great first step in seeking limited liability, it is not the only step.
To learn more about piercing the corporate veil and personal liability protections afforded under Iowa law, consider contacting a licensed attorney and see the business law articles linked below: