Ruling gives LLCs more limited liability
Last Updated: 14:39 June 17, 2013
The court also ruled last week that LLC managers do not owe creditors of the company a fiduciary duty when the company is insolvent.
The case, argued by Boulder-based law firm Berg Hill Greenleaf & Ruscitti LLP, makes Colorado more attractive in which to form an LLC and serves as precedent for other states.
"Up until this ruling, 'limited liability' was an oxymoron in the state of Colorado relative to personal liability to creditors when the company was in the zone of insolvency," said Giovanni Ruscitti, a partner at BHG&R. "With this ruling, owners and managers of an LLC no longer need to fear personal attacks from creditors. This is a tremendous win for Colorado and the companies that choose to organize in the state."
LLC is a form of business entity that allows for pass-through taxation and offers flexibility in terms of ownership and management structure.
"LLCs are in many ways a hybrid between traditional corporations, partnerships and sole proprietorships, but are primarily governed by the state's LLC Act and the LLC's operating agreement," Ruscitti said. Consequently, courts across the nation are being asked to determine how LLCs should be treated under the common law - like corporations, partnerships or something entirely new.
Chief justice Michael L. Bender delivered the clarifying opinion on the Weinstein v. Colborne Foodbotics case.
"Members are liable to the LLC but not the LLC's creditors," Bender wrote. "We also conclude that the manager of an insolvent LLC does not owe the LLC's creditors the same fiduciary duty that an insolvent corporation's directors owe a corporation's creditors. Here, the plaintiff, as a creditor of the LLC, may not assert a claim for either unlawful distribution against the defendant members or a common law breach of fiduciary duty against the defendant managers absent express statutory authority."
"This was a blind spot in the Colorado LLC statute," said Heidi Potter, partner at BHG&R. "Now, companies can confidently organize in the state of Colorado, knowing that their owners and managers can operate free from fear of personal suit except in the most egregious of cases. This will encourage entrepreneurs and business owners to continue to organize and locate their businesses in Colorado."
While the Weinstein case involved issues relating to an insolvent LLC, Ruscitti said a major concern for lawyers and entrepreneurs using the LLC structure was whether state courts would expand the Colorado Court of Appeals' previous ruling in Weinstein to situations where the LLC was solvent. "This would have essentially killed the LLC entity structure in Colorado, and we would have urged all clients to organize their LLCs elsewhere."
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