Classification

• For federal tax purposes, the IRS does not recognize an LLC as a distinct category. An LLC must file taxes as a corporation, partnership or sole proprietorship.
  
  

Limited Liability

• An LLC is a popular business form because owners have limited personal liability for the debts of the corporation. Thus, the members of the LLC can limit their personal liability from third party tort and contract claims.
  
  

Avoiding Liability

• Separate the LLC from the parent company. The LLC should have a separate office along with separate business accounts and assets. The LLC should enter into its own business agreements and clearly indicate the LLC is bound by the agreement.
  
  

Piercing the Corporate Veil

• As a general rule, courts will not allow the corporate veil to be pierced if: corporate formalities have been observed, corporation's initial financing was adequate and the corporation was not formed to evade existing obligations or defraud creditors. When the corporate veil is pierced, the corporate entity is disregarded and members may become liable for the corporation's unsatisfied debts. Typically the corporate veil is only pierced for closely held corporations. (e.g. with one member, family, or a small number of members)
  
  

Insolvency

• When an LLC is insolvent, creditors may seek payment from members or the holding company. In most cases, courts will not hold the parent company liable for the subsidiary's obligations if there is no fraud or wrongdoing, no intermingling of respective business transactions, accounts and records, the subsidiary was adequately financed for normal business obligations of its size and character, the parent company and subsidiary were held out to the public as separate entities.