LLC Veil Piercing & Substantive Consolidation

A limited liability company can function as an extremely powerful and flexible Illinois business organizationstructure.  The LLC, if structured properly by a Chicago business lawyer, can shield members (aka LLC business owners) from the legal obligations and debts of the LLC.

In limited liability companies which are solely owned, small or family owned, business assets and business liabilities may often overlap and intertwine with a members personal asset and liabilities (aka commingling), which can result in veil piercing. This can sometimes stem from ambiguous contractual agreements, omission of LLC formalities, or even the existence of fraud or tax evasion. In any case, failing to operate an LLC as a separate business in any capacity may lead courts to pierce the LLC’s veil and use the owner’s personal assets to satisfy the business debts.

Substantive consolidation is a close cousin of veil piercing.  It allows bankruptcy creditors to satisfy an obligation with the consolidated assets of affiliated entities. Substantive consolidation treats separate legal entities as if they were merged into one, with the surviving entity holding all of the cumulative assets and liabilities.

The remedy is used when a non-debtor is a subsidiary or alter ego of the debtor, or where the entities’ assets and liabilities are so intertwined that it would be impossible to disentangle their affairs. In turn, substantive consolidation protects creditors from a debtor’s shell game. For substantive consolidation to be granted, its potential benefits must outweigh any potential harm to interested parties.

For clients with both simple and sophisticated single, multi-member or multi-entity LLC structures, separateness is the key to asset protection—separate bank accounts, separate employees, separate governing documents, and separate records. Contact our Chicago corporate attorneys to learn more about our counsel for business transaction legal services and how you can separate your personal and business assets so as to limit the possibility of veil piercing and remove the need for substantive consolidation.