Abolishing LLC Veil Piercing
Stephen M. Bainbridge | 2005 U. Ill. L. Rev. 77
Courts are now routinely applying the corporate law doctrine of veil piercing to limited liability companies (LLCs). This extension of a seri-ously flawed doctrine into a new arena is not required by statute and is insupportable as a matter of policy. The standards by which veil piercing is effected are vague, leaving judges great discretion. The result has been uncertainty and lack of predictability, thus increasing transaction costs for small businesses. At the same time, however, there is no evidence that veil piercing has been rigorously applied to effect socially beneficial policy outcomes. Judges typically seem to be concerned more with the facts and equities of the specific case at bar than with the implications of personal shareholder liability for society at large.
A standard academic approach treats veil piercing as a safety valve al-lowing courts to address cases in which the externalities associated with limited liability seem excessive. In doing so, veil piercing is called upon to achieve such lofty goals as leading LLC members to optimally internalize risk, while not deterring capital formation and economic growth, but while promoting populist notions of economic democracy. Given the vagueness of veil piercing doctrine and the arbitrariness with which it is applied, however, veil piercing is too weak a tool by which to accomplish so much. Abolishing veil piercing would refocus judicial analysis on the appropriate question—did the defendant-LLC member do anything for which he or she should be held directly liable?