LLC liability

[kmclaurin]

What is the name of your state (only U.S. law)? California

I've developed a computer program and the client I developed it for thinks we can sell it on a subscription basis on the internet.
We have discussed forming an LLC for the purpose of marketing the program.
There would be 3 partners in the LLC.
One of the 3 (partner1) says he wants to put his daughter as the partner, instead of himself.
When I asked why, he said he doesn't want this new partnership linked in any way to his existing company, so he wants his name out of it.
(he is a senior VP at an insurance company).
My question is, should I be suspicious of this request? If the LLC is sued for whatever reason, and they decide to go after our personal assets,
would the 3rd partner (partner3) and me have more of our assets at stake? His daughter is a college student and of course has no net worth to speak of,
compared to her father.
For example :
My net worth $200,000
partner3 net worth : $300,000
partner1 daughter net worh : $0

If we are sued for $500,000 and they come after our personal assets, do partner3 and me have to shoulder that burden ourselves, since she has zero net worth?

I know that LLCs should shield our personal assets, but my understanding is they can come after your personal assets under certain circumstances (undercapitalized for instance).

 

[latigo]

What is the name of your state (only U.S. law)? California

I've developed a computer program and the client I developed it for thinks we can sell it on a subscription basis on the internet.
We have discussed forming an LLC for the purpose of marketing the program.
There would be 3 partners in the LLC.
One of the 3 (partner1) says he wants to put his daughter as the partner, instead of himself.
When I asked why, he said he doesn't want this new partnership linked in any way to his existing company, so he wants his name out of it.
(he is a senior VP at an insurance company).
My question is, should I be suspicious of this request? If the LLC is sued for whatever reason, and they decide to go after our personal assets,
would the 3rd partner (partner3) and me have more of our assets at stake? His daughter is a college student and of course has no net worth to speak of,
compared to her father.
For example :
My net worth $200,000
partner3 net worth : $300,000
partner1 daughter net worh : $0

If we are sued for $500,000 and they come after our personal assets, do partner3 and me have to shoulder that burden ourselves, since she has zero net worth?

I know that LLCs should shield our personal assets, but my understanding is they can come after your personal assets under certain circumstances (undercapitalized for instance).

First, there are no such animals as "partners" in a Limited Liability Company. The word "partners" in business parlance is a discriminating term connoting a legal relationship of reciprocating agency and personal liability that LLCs are specifically designed to avoid!

Secondly, where in California's Revised Uniform Limited Liability Act is there any mention of "capitalization"? Have you read the Act?

Thirdly, the only practical consideration to be given the financial worth of the individual members of an LLC would be the ability to advance the company's business interests and purposes by personal guarantees and/or perfect personal loans to the enterprise.

Factors permitting creditors of the company to "pierce the shield" and levy upon the assets of the individual members would obviously include individual personal guarantees as well as fraud: misuse of company assets to the detriment of creditors; failure to maintain financial records and generally treating the LLC as a mere front or alter ego. But there is too great a vicissitude of circumstances and contingencies to be examined but in a general way.

What is essential is that if you go ahead as planned that you do so only under the hands-on guidance of experienced professional counseling - legal, accounting and taxation.

 

[kmclaurin]

LLC Liability

No, I have not read the act you mention. I've read on several websites similar to :
Inadequate Capitalization
A court may pierce the LLC’s veil of limited liability when it finds either of the following factors: The LLC had seriously inadequate capitalization, did not recognize a separation between the personal business of the members and the LLC’s business, or operated as its members’ alter ego. When the court pierces the veil, it will hold the members of the LLC personally liable for the debts owed by the LLC. Some states require a finding that the members intentionally undercapitalized the LLC to avoid having to pay future debts before they will allow a court to pierce the LLC’s veil of limited liability. Other states require serious undercapitalization in addition to other factors. Courts base their decisions of the factors present in each case.

Thanks for your advice.