Full question:
If an individual has a pre-existing debt and they open a business as an LLC, could the LLC be sued to collect that debt even though the LLC is a separate business entity?
- Category: LLC
- Date:
- State: Pennsylvania
Answer:
If a LLC is created with knowledge of an impending claim, it is possible the LLC assets could be challenged as a fraudulent conveyance. For example, transfering assets to a LLC right before filing bankruptcy may throw up red flags for examination.
The elements of a fraudulent conveyance transfer are defined as follows by the Uniform Fraudulent Transfer Act:
(a) A transfer made or obligation incurred by a debtor is fraudulent as to a creditor, whether the creditor's claim arose before or after the transfer was made or the obligation was incurred, if the debtor made the transfer or incurred the obligation:
(1) with actual intent to hinder, delay, or defraud any creditor of the debtor; or
(2) without receiving a reasonably equivalent value in exchange for the transfer or obligation, and the debtor:
(i) was engaged or was about to engage in a business or a transaction for which the remaining assets of the debtor were unreasonably small in relation to the business or transaction; or
(ii) intended to incur, or believed or reasonably should have believed that he [or she] would incur, debts beyond his [or her] ability to pay as they became due.
In some cases, it is possible to sue a person individually under an alter ego theory, in which the court will "pierce the corporate veil" to find that person liable when there is really no separate identity of the individual and corporation. Whether the alter ego theory applies will be a determination for the court, based on the facts and circumstances in each case.
This content is for informational purposes only and is not legal advice. Legal statutes mentioned reflect the law at the time the content was written and may no longer be current. Always verify the latest version of the law before relying on it.
