Wyoming became the 1st state to enact a true Limited Liability Company in 1977. It was best described as a hybrid between a partnership and a corporation.  Its popularity was slow to come as other states did not follow suit until the 1990’s. After that the LLC quickly became the entity of choice for business owners because if its ease of management, pass through taxation and in a lot of cases they were much less expensive to set up and run than a corporation. Statistics, today, show that 4 out of every 5 new business startups are set up as a LLC.

“Ease of management” is what made a LLC so popular. You could have the limited liability of a corporation without having to keep up with the arduous paperwork that was required for corporations. No meetings, no corporate record keeping, no reports. It was said to be as easy as running a sole proprietorship with asset protection. Business owners felt that they got the best of both worlds!

As its popularity grows though, the case law and the fine tuning of statutes that each state begins to modify language within Limited Liability Company regulations is changing the LLC forever. Each state has the ability to insert their own regulatory thumbprint on the laws, and until now the statutes were either lenient or lacking.

Now, most states have “Revised” acts in place and some written laws are demanding that LLC owners manage the records just like a corporation in order to keep their limited liability protection. Even if a state does not have a revised act in place as of yet, the opinions of the attorneys in that state who are watching case law closely are warning business owners to begin following the same formalities as a corporation.

Richard Keyt, Esq., an Arizona attorney recently wrote, “Although annual or regular meetings of members and managers are not required by Arizona statutory law, I recommend that all Arizona limited liability companies hold regular meetings and annual meetings of members and managers because it is a good business practice. An Arizona LLC that has a documented history of holding regular and annual meetings of members and managers will be in a strong position to convince an Arizona court that the members of the LLC are operating the LLC like any prudent business and should be entitled to the protection of the LLC shield”.

So, through either written law or opinion, members of Limited Liability Companies are now held to the same formalities of corporate owners. This includes the following operating requirements, that formerly LLC’s did not have to comply with:

• A written operating agreement among members.
• Documented Distribution of the shares between the members.
• Making sure not to treat the LLC as an extension of their personal affairs.
• Annual and regular meetings of the members documenting important events and transactions.

A recent article, “Owner Liability Protection and Piercing the Veil of Texas Business Entities” by Elizabeth S. Miller, Professor of law at Baylor University School of Law included in the Limited Liability Companies section, “Like the predecessor Texas Limited Liability Company Act (“TLLCA”), the LLC provisions of the BOC as originally enacted did not address whether or under what circumstances a claimant may “pierce” the liability shield of an LLC in order to hold a member liable for a debt or other liability of the LLC. In 2011, the BOC was amended to provide that Sections 21.223-21.226, which include strict standards for piercing the corporate veil in a case arising out of a contract of the corporation, apply to LLCs.3 See Tex. Bus. Orgs. Code § 101.002. One Texas commentator has argued that the statutory limitation of liability in the Texas LLC statute was intended to be absolute, i.e., that the legislature did not address veil piercing in the LLC statute because it did not intend for veil piercing to occur in the LLC context.”

The opinion explained that in court, the guidelines of holding a member of a LLC were not in existence and the courts were actually borrowing the veil piercing guidelines from Corporations. As of 2011, LLC’s now have their own guidelines in the Texas Business Organizations Code.

Texas is not alone, and as stated earlier, all states are revising if not having already revised LLC guidelines to keep up with corporate formalities right alongside corporations.

What does this mean for LLC owners? This means that the ease of management and paperwork guidelines for LLCs are now a thing of the past.