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Minnesota Court of Appeals “Pierces the Corporate Veil” of a Single Member LLC

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This is a case that may give small businesses pause, especially businesses with only one employee.  In SCA License Corporation v. Steve Hackbarth a/k/a Steven Hackbarth d/b/a/ Hackbarth Roofing, the Minnesota Court of Appeals found that Mr. Hackbarth’s company, West Builders, LLC, was simply his “alter-ego” for purposes of certain debts he  incurred in the name of the company.

West Builders contracted with SCA License Corporation (“SCA”) to produce radio advertisements for it.  SCA eventually brought a lawsuit against West Builders for non-payment.  The court of appeals agreed with the trial court that West Builders was Mr. Hackbarth’s “alter-ego,” and that he could be held personally liable for the company’s debts.

The court of appeals noted that:  “Several factors are considered when determining whether a corporation was formed as the shareholder’s alter ego, including whether (1) there is sufficient capitalization for purposes of corporate undertaking; (2) corporate formalities have been observed; (3) dividends have been paid; (4) the debtor corporation was solvent at the time of the transaction in question; (5) the dominant shareholder siphoned funds; (6) there is a nonfunctioning of other officers and directors; (7) there is an absence of corporate records; and (8) the corporation exists as a mere façade for individual dealings.”  “When using the alter ego theory to pierce the corporate veil, courts look to reality and not form, with how the corporation operated and the individual defendant’s relationship to that operation.”

The court of appeals affirmed the trial court’s findings based upon the:  (1) the lack of West Builders following LLC formalities; (2) the absence of LLC records; and (3) West Builders’s existence as a mere façade for Hackbarth’s individual dealings.”

Small businesses with one or just a few shareholders may want to take note of the factors described by the court.

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