Expert: Michael Fay - 2/9/2011

Question
QUESTION: Can credit card companies that I personal owe freeze the account of my L.L.C.company AND TAKE THAT MONEY

ANSWER: Allen,
There is not enough information here to fully answer that question, because I don’t know how the accounts were set up.  However I can give a few conditions under which this can happen:

1) if you have EVER co-mingled transactions (in either direction) then you have not maintained the corporate shield and they are allowed to take that action.  It is referred to as “piercing the corporate veil.”  If you bought personal items with a corporate card or business items with a personal card, and a review of the transaction history can often indicate such a breach.  This is especially true if both cards are from the same financial institution- which you seem to indicate is the case.

2) If you provided a personal guarantee for the corporate card, the answer is also yes.  This is not as clear cut and does not always hold up to a challenge; however it falls under the same interpretation of “piercing the corporate veil” and is usually upheld.

3)  If you set up the business account while you were a sole proprietor or general partnership and then converted the business to an LLC.  (Also a grey area subject to interpretation)

4)  If the status of your LLC is no longer in good standing, then the entity does not legally exist and therefore they can freeze those accounts.

I hope this helps to understand some of the ways that this can happen.  I know that it does not seem fair and indeed it may not be, but you did not provide enough information for a full review.  Moreover, such a review might be better for legal counsel than for this type of forum.

Best of luck,
Michael


---------- FOLLOW-UP ----------

QUESTION: Thank-you. Would I be protected from personal debt, if I change my L.L.C. company to a corporation.

Answer
Allen, the same answers apply.  LLC and INC are two different types of the same thing and the law treats them similarly in this situation (except for taxes).  Both corporations and LLC are each viewed as an “artificial person.”  So you have more protection when you have the umbrella of the artificial person to operate under (either LLC or INC) but you are not always “protected from responsibility.”  Moreover, changing from LLC to INC might make matters WORSE because of the change in tax structure – not to mention the other expenses of the filings.

Best of luck,
Michael