When starting a business, one of your first considerations should be how to avoid personal liability. The activities and debts of the business should not threaten your residence, retirement accounts, or personal bank accounts.
Courts often describe these personal liability protections as the entity’s “corporate veil.” Generally, a corporation or limited liability company enjoys limited liability, meaning that the individual owners are not responsible for the debts of the entity. Under certain circumstances, however, the corporate veil may be “pierced,” imposing personal liability on business owners. A recent decision by the Nebraska Supreme Court illustrates the benefit of establishing an entity to benefit from limited liability protections.
Laying the Foundation
Earlier this year, the Supreme Court decided Perkins, L.L.C. v. RMR Building Group, LLC, 320 Neb. 707 (2026). A real estate developer, Perkins L.L.C. (“Perkins”) hired a general contractor, RMR Building Group, LLC (“RMR”) to renovate a shopping center. Under the parties’ “cost-plus” contract, RMR invoiced Perkins in advance for construction costs, plus RMR’s percentage fee. When Perkins paid those invoices, RMR was supposed to use the funds to pay subcontractors and suppliers.
This arrangement broke down after RMR failed to apply a payment from Perkins of over $500,000.00 to HVAC equipment installed on the project. Instead, RMR applied the funds from Perkins to its creditors unrelated to the project in violation of the traditional cost-plus arrangement. After these issues arose on the project, RMR quickly closed its doors and ceased doing business. Eventually, Perkins brought claims against RMR and its sole owner, Robert Ryan (“Ryan”). The trial court had no difficulty finding that RMR had breached the contract and was liable for damages. But because RMR was no longer an operating entity, it presented a more difficult question, whether Ryan himself was personally liable.
Cracks in the Structure
RMR had long-running financial woes. By the time RMR received Perkins’ payment for the HVAC equipment, RMR’s accountant testified it was delinquent on “quite a few” other projects. RMR used Perkins’ funds to make payments on multiple debts for which Ryan was personally liable including an unrelated loan and lawsuit, along with other general operating expenses of the business. For example, RMR used nearly $100,000.00 for payroll payments instead of paying for the HVAC equipment. Ryan wound up RMR’s operations over the next 6 months and terminated all employees. Despite the company’s dire financial situation, Ryan continued to receive a salary of $1,000.00 per week for several months before the entity was eventually dissolved completely.
Inspection Results
The first court to consider the case at the trial level refrained from piercing RMR’s corporate veil, finding that Ryan was not personally liable. Perkins appealed this decision to the Nebraska Court of Appeals that reversed the trial court’s decision, emphasizing that the payment of RMR’s debts was prioritized by Ryan and for his personal benefit. Nevertheless, on Ryan’s appeal, the Nebraska Supreme Court reversed the Court of Appeals and gave full effect to RMR’s limitation on Ryan’s personal liability.
The Blueprint: How Courts Evaluate Veil Piercing
To determine if a business owner should be personally liable for company debts, Nebraska courts assess four factors. Perkins v. RMR provides a fresh formulation of those factors by the Nebraska Supreme Court. The Court frames these factors in the terminology of a corporation and its shareholders, but the same rationale applies to an LLC and its members.
- Inadequate Capitalization. An entity is “undercapitalized” when it is set up with too little money or financial backing in relation to the nature and risks of its business. Whether an entity is “undercapitalized” is only assessed at the time of the company’s formation.
- Insolvency. A corporation is “insolvent” if it is unable to pay its debts as they become due, or if it has an excess of liabilities over its fair valuation. Unlike the adequacy of capitalization, insolvency is assessed at the time that a particular debt is incurred.
- Diversion of Funds. Funds (or other business property) are “diverted” when a shareholder appropriates and uses corporate funds for their own personal use or for other improper uses.
- Facade. The corporate entity is a mere “facade” if a shareholder uses it to conduct his or her personal dealings in disregard of the corporate entity. Essentially, it must be shown that the entity is an empty shell with no legitimate business purpose.
Reviewing the Blueprint
In Perkins v. RMR the Supreme Court found that, even though RMR struggled financially throughout its existence, the parties presented no evidence that it was undercapitalized when it was first formed. Without such evidence, the court was unable to measure RMR’s capitalization at the time of its formation.
The Supreme Court acknowledged that RMR was insolvent (i.e. could not pay its debts) when it incurred its obligation to Perkins, and that this factor weighed in favor of piercing RMR’s corporate veil. But the Court held that, at least in this case, insolvency alone was not enough to impose personal liability.
Perkins v. RMR shows that a diversion of funds must be direct to support veil piercing. Ryan was personally liable for the debts that RMR prioritized, but they were personal guarantees related to business debts. It would have been a diversion for RMR to pay Ryan’s mortgage. But where all payments were made for legitimate business expenses, and where Ryan’s salary was not “exorbitant,” the Court found no diversion, despite obvious benefits to Ryan.
Only flagrant disregard of corporate formalities or failure to engage in legitimate business activity will trigger this factor. In finding that RMR was not a facade for Ryan’s personal dealings, the Court observed that RMR served as a general contractor on construction projects, hired and paid employees, and attempted to make a profit.
Building Smarter
This case emphasizes that personal liability protections for owners of corporations and LLCs are highly effective. RMR failed the Supreme Court’s analysis on one of the four veil piercing factors (insolvency) and drew the Court of Appeals’ scrutiny on a second factor (diversion of funds), but ultimately it was not enough for the Supreme Court to pierce the corporate veil.
For owners of existing corporations or LLCs, the effectiveness of personal liability protections offers peace of mind, and a working knowledge of the basis for piercing the corporate veil only strengthens those protections. Veil piercing is more about corporate procedure than it is substance. If corporate formalities and practices are followed, limited liability protections should be maintained as they did in Perkins v. RMR.
Forming and operating an LLC is relatively inexpensive and involves minimal red tape. The corporate veil is a formidable shield to personal liability that business owners should never be without. In addition, these same considerations apply for companies considering a reorganization into parent and subsidiary companies to maintain separate corporate veils for different lines of business. For example, a construction company may create a subsidiary for its construction services, a subsidiary to own equipment, and a related company to own real estate. As another example, a business owner that owns real estate should consider owning the real estate in a separate LLC, so that the assets owned by LLC are better protected from the activities and debts of the operating business.
If you have questions or need assistance to form a business entity, please contact a member of Woods Aitken LLP’s Business Services Practice Group.