If you own a limited liability company or a limited liability partnership in Kentucky, you may enjoy the benefits of personal asset protection and pass-through taxation. However, these benefits are not guaranteed and can be lost if you do not follow certain rules.
Piercing the corporate veil
One of the main risks that LLC and LLP owners face is the possibility of the legal doctrine known as piercing corporate veil. This allows a court to hold entity owners personally liable for the company’s debts and obligations.
Piercing the corporate veil can happen when an entity is used to abuse the law (i.e., commit fraud, evade taxes, etc.). It can also happen when an entity fails to maintain its legal formalities (i.e., holding meetings, filing annual reports, etc.).
Another way that LLC and LLP owners can destroy their limited liability status is by signing personal guarantees for their entity’s debts or obligations. These are often required by lenders, suppliers, etc., who want to reduce their risk.
Alter ego liability
A third way that LLC and LLP owners can destroy their limited liability status is by becoming an alter ego of their entity. This is a situation where an owner exerts such complete control that the entity becomes indistinguishable from the owner’s personal affairs. This can happen when the entity’s separate existence is disregarded, the owner uses the entity for personal purposes or the owner uses the entity to manipulate it to avoid creditors or liabilities.
Owning an LLC or an LLP in Kentucky can provide many advantages for entrepreneurs and professionals who want to protect their personal assets and enjoy tax flexibility. However, these advantages are not absolute and can be jeopardized by careless or fraudulent actions that undermine the entity’s legitimacy.