Establishment of a Single-Member Limited Liability Corporation
Limited liability corporations gained popularity following the enactment of permissive statutes in many states. However, it did not take long for the courts to erode the limited liability of such entities.
In the 1990s, for example, the trend was toward “piercing the veil” of limited liability corporations, similar to the way courts “pierced the veil of other corporations.”
Single-member Limited Liability Companies, in particular, offer dubious asset protection. In a single-member LLC, you are the sole member. (LLCs have “members” rather than “shareholders”).
A single-member LLC offers no asset protection, because your membership interest can be taken by creditors, who may then liquidate the LLC and distribute the assets of the LLC to themselves.
Recently, a U.S. Bankruptcy Court in Colorado stated:
“Because the Trustee became the sole member of Western Blue Sky LLC upon the Debtor’s bankruptcy filing, the Trustee now controls, directly or indirectly, all governance of that entity, including decisions regarding liquidation of that entity’s assets . . . . [I]t is hereby ordered that the Trustee, as sole member, controls the Western Blue Sky LLC and may cause the LLC to sell its property and distribute net proceeds to his estate. Alternatively, the Trustee may elect to distribute the LLC’s property to the bankruptcy estate, and, in turn, liquidate that property himself. . . .”
In re: Albright, Case no. 01-11367 ABC, U.S. Bankr. Dist. Co., April 4, 2003.