This case illustrates one of the chief inherent dangers of the Single Member LLC — which is that they are “an alter ego case waiting to happen”.

1. When Your “Alter Ego” May Not Be
Enough
This case illustrates one of the chief inherent dangers of the Single Member LLC — which
is that they are “an alter ego case waiting to happen”.
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LAW OFFICE OF DAVID PARKER BLOG
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2.  An LLC can be an excellent vehicle for limiting liability in
business operations, which is of course the point of the
enterprise and the reason why business owners incorporate to
begin with. But a SMLLC – a “single member limited liability
corporation” – which is another name for an incorporated sole-
proprietor business – carries dangers of its own, as illustrated by
the recent case of Martin v. Freeman (Colo.App., Feb. 2, 2012).
The case and its implications were described in a recent article
in Forbes.
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LAW OFFICE OF DAVID PARKER BLOG
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3.  The case, which has important lessons for New York asset
protection as it concerns small business owners, involved veil-
piercing. Mr. Freeman was the owner and sole proprietor of an
LLC that was involved in some expensive litigation. Freeman
sold assets of the business in order to cover the legal fees
involved in that litigation. But in doing so, Freeman left the
company under-capitalized, with no assets to cover the
judgment, and this meant that he himself became liable for
those costs.
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LAW OFFICE OF DAVID PARKER BLOG
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4.  Part of the problem was the way in which Freeman did all this.
He sold assets of the business and received the proceeds himself
in his own name as an individual – but then turned around and
used them to pay a business-related expense, namely the legal
fees associated with the litigation. By doing this, he failed to
maintain a proper legal distinction between Freeman the
individual and Freeman as proprietor of the company.
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LAW OFFICE OF DAVID PARKER BLOG
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5.  What this goes to show is that special diligence is required in
the case of an LLC with only one member, where there are no
partners to keep each other on the straight and narrow. There’s
no inherent reason why a single-member LLC has to be
different from those with more than one member, but the
temptation to cut corners and get lazy is greater. All of which
illustrates the complexities involved in NY estate planning
where a small business is part of the family assets.
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LAW OFFICE OF DAVID PARKER BLOG
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6. Law Office of David Parker
Estate Planning and Elder Law
 www.parkertrustlaw.com