That Doesn’t Belong to You

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With the relative informality of limited liability companies (“LLCs”), it can be very easy for LLC members to fall into the trap of thinking that the company’s assets are their own. I find this happens often with restaurant clients, with the members starting to look at the restaurant’s food, wine, and spirits as things they can just take or consume whenever they want, but the temptation can apply to any business. The fact is, though, that the company’s assets don’t belong to its owners.

Ownership of an interest in an LLC is very much like owning shares of a corporation. One can hardly imagine a Microsoft shareholder walking into the Microsoft store and walking out with software without paying or a Coca-Cola shareholder wandering into a bottling plant and grabbing a six pack or two. That is because the assets of those corporations belong to the corporations, not the individual owners. The same is true for LLCs and their members; the LLCs own the assets, and the owners own an interest in the LLC.

In fact, LLC members who treat the company’s assets as their own are in danger of eroding the liability protection that led them to set up the LLC in the first place. A creditor or other party with a claim against an LLC can “pierce the veil” – that is ask the court to ignore the company’s separate legal existence – and proceed directly against the assets of the members when, among other circumstances, the members treat the company’s assets as their own. This includes using company funds to pay for personal expenses.

This is not to say that there aren’t circumstances in which members can receive assets from the company. There may be business reasons for a member to receive company assets. Consider an LLC which operates a winery; if a member is going to serve patrons in the winery’s tasting room, it would seem appropriate that the member be given a bottle of each of the winery’s wines in order that he or she might become familiar with, and conversant about, the company’s wines and their taste profiles.

Alternately, members might receive company assets as distributions. Taking the winery LLC again, it’s not hard to imagine that its members might receive bottles of wine in addition to any cash distributions. If an LLC distributes assets to members, however, it should do so in accordance with the distribution provisions of the LLC agreement, which likely means that distributions are made in proportion to each members’ ownership interest in the company.

Whichever the case may be, it is important, both to preserve personal liability protection and to promote harmony among the members, that any transfers of company assets to members be done in accordance with a written policy or document. And it is important that the company and the members actually follow the policy. If they don’t – if they fail to exercise discipline in adhering to the policy – then they could open themselves up to the possibility of claims from among themselves and from outside parties.


About the Authors

Andrew Clapp

Andy’s practice spans business, finance, securities and real estate law. Andy advises companies throughout the entire life cycle of the company – from formation, early-round fund raising, corporate governance, operations and management, to merger, sale or succession.

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