¶ 1501
Overview
Scope of the chapter. Business entities are the most widely used protective structures in American practice. A corporation, limited liability company or limited partnership stands between its owners and the world in two directions. It protects the owners from the entity's own liabilities. It also protects the entity's assets from the owners' personal creditors. This chapter examines the first protection, which practitioners call protection from inside liability, and the doctrines that defeat it: veil piercing, enterprise liability and the statutes that make owners and managers personally liable regardless of the entity. It also examines reverse veil piercing, which attacks the second protection by treating the entity's assets as the owner's. Chapter 16 examines the second protection in detail, through the charging order and the law of single-member and series LLCs (see infra ch. 16).
Why entities matter. An entity costs little to form and maintain, is recognized in every state and abroad, and carries a legitimate business purpose that no creditor can question. Its protective effect does not depend on the timing of a transfer in the way that a trust's does, because forming an entity to conduct a new business, or to hold a new asset, gives the owner equity of equal value and depletes nothing. And its protection grows with use: an entity that operates as a real business, with its own capital, accounts, contracts and insurance, is far harder to disregard than one that exists only on paper.
The limits of entities. An entity cannot protect an owner from the owner's own torts, from obligations the owner has personally guaranteed or from statutes that impose personal liability on those who control a business. It cannot protect the owner's equity in the entity from the owner's personal creditors except to the extent the law of the entity's jurisdiction limits their remedies (see infra ch. 16). And it can be disregarded by a court that finds the owner has treated it as an extension of the owner's own affairs. Each limit is examined below.
Entities in the Threat Matrix. Entities are strong against C1 and C2 creditors of the entity, who are confined to the entity's assets, and of moderate strength against C1 and C2 creditors of the owner, depending on the charging-order rules. They are weak against C3 spouses, whose claims reach the owner's equity in a divorce, against C4 support claimants, and against C5 sovereign creditors, who have statutory remedies against responsible persons. Against C6, the owner's bankruptcy trustee succeeds to the owner's equity and its rights. The ratings are summarized in ¶ 1590.
How to read the chapter. Paragraph 1510 defines inside and outside liability and surveys the forms of entity. Paragraph 1520 addresses the choice of entity. Paragraph 1530 examines veil piercing, and ¶ 1540 enterprise and single-business theories. Paragraph 1550 treats reverse veil piercing. Paragraph 1560 describes the segregation of risk among entities, and ¶ 1570 the formalities and operating practices that preserve the entity. Paragraph 1580 surveys the personal liabilities that no entity shields, and ¶ 1590 places entities in the Threat Matrix.