How to Take Down a Non-Compliant and Fraudulent LLC

LLCs are required to meet federal, state, and county rules and bylaws in order to keep them in good standing within the states where they do business. If these LLCs are non-compliant with such rules and bylaws, penalties can be levied against them causing them to lose their asset protection. At this point, the personal assets of members and member managers would no longer be shielded from lawsuits brought against them by creditors or injured parties. This is known as "piercing the corporate veil." If a fraudulent LLC caused you damages, and you decided to take down that LLC, you would need to pierce its corporate veil. However, in order to be successful, you must follow certain legal procedures to show evidence that the LLC was non-compliant and fraudulent within the state where it conducts business.

First and foremost, this author does not claim to be an attorney, and is neither qualified nor attempting to give legal advice of any kind. Therefore, you will need to hire a good corporate attorney. Corporate attorneys are often litigation specialists who address legal business matters, and are equipped to handle corporate liability lawsuits. Make sure to secure an experienced corporate attorney who is an expert in corporate law, and is very knowledgeable of federal and state corporate compliance laws.  She must also be an authority on the lawful procedures for going after non-compliant and fraudulent LLCs. You will work with your corporate attorney throughout the trial process.

Through your corporate attorney, you will need to file a lawsuit. You will do this by filing a summons with the court clerks in the states where the LLC is located, and pay the required fees. The summons notifies the owners of the LLC that they are legally obligated to respond to the summons within a certain period of time, or appear in court by the designated dates and times. The lawsuit must be served according to the laws of the state in which the lawsuit is filed. If the lawsuit is filed in federal court, you must comply with federal laws. You must name the LLC as the defendant by using its complete corporate name and business location. The summons is then served to the defendants of the LLC in person by the sheriff, or are sent by mail by the court clerks.

You will then need to provide evidence that the LLC misused corporate funds. Show proof that the owners treated the operating funds as if they were their personal earnings. Demonstrate that the LLC’s owners intentionally withdrew funds and used them to conduct illegal activities. Confirm that the funds were used to intentionally harm others. Substantiate that the owners moved funds back and forth between their business and personal accounts (known as commingling). Also, you will need to substantiate that at least some of the shareholders, officers, and directors of the non-compliant or fraudulent LLC were fully aware of the misuse of funds; even if they weren’t direct participants themselves.

Demonstrate that the LLC committed fraud. The more severe the fraud, the more likely the limited liability company will be stripped of its asset protection. Show that the LLC made misrepresentations about its financial status. Prove that it promised to perform its obligations while otherwise knowing that it either couldn’t or never intended to do so. You will also need to establish that the LLC made representations that led creditors or individuals to believe that a third party (and not the limited liability company) was responsible for repayment of incurred debts.

Show that the LLC failed to observe corporate formalities. Failure of a limited liability company to comply with corporate formalities is another non-compliant factor that will result in losing its LLC asset protection. Illustrate that the LLC did not have the required operating agreement in place with distinct roles for the members. Substantiate that it held no outlined distribution guidelines and no adequate records for such issues as business transactions and meetings. Argue and prove that there was no members list, no articles of organization, no tax returns for the past three years, no bank statements and no record of any required voting by the members. If any of these corporate formalities are not met, the LLC will lose its asset protection.

Argue that the non-compliant and fraudulent LLC had inadequate or zero capitalization. LLCs with too little or no invested capital are very likely to lose their limited liability company protection. For example, if an LLC siphons off assets or profits to shell companies that it created in order to limit its risk of loss, this will not only demonstrate undercapitalization, but will also prove that the LCC acted with malevolence. Also, if the owners intentionally kept the LLC in a financial state where it lacks the funds needed to pay back its creditors, this will also show undercapitalization. You must show that the LLC has insufficient funds, and determine that its undercapitalization is due to deceptive funds investments.