The limited liability company (LLC) has been around for years now. They are touted as the best way to protect both the business/investments from personal lawsuits that the owner of the LLC may have and to protect the owner from a lawsuit that hits the business or investments.
Since these entities are established at the state level, the actual results can vary wildly. For example, a single member LLC (only one owner) in Florida has no asset protection whatsoever. The Florida state legislature saw to that. Other states provide good asset protection for single member LLCs. And some seem to be a little more on the fence.
The challenge seems to be with single member LLCs. And there has been just another case that makes us think twice about the asset protection they provide. This case it was an Arizona single member LLC (SMLLC).
Blizzard Entertainment, Inc sued MDY Industries, LLC. MDY is a single member LLC. The owner is Michael Donnelly. MDY developed a game program that allowed game players to progress in World of War (a Blizzard Entertainment product) even if they weren’t personally active. The add-on provided a gross revenue of close to $3.5 million to MDY. However, there were a lot of complaints that Blizzard had to handle, taking enormous and costly resources. The costs borne by Blizzard were close to $1 million.
In the two-day long trial, the District Judge found that MDY and the owner, Donnelly, were liable for four counts of trademark infringement and awarded a judgement of $6.5 million. The judge specifically includes Donnelly in the judgement because he had written most of the code for the program. He was the sole member (owner) of the LLC.
Donnelly and MDY appealed and the 9th Circuit Court of Appeal held that MDY is guilty. However, they didn’t rule specifically on whether the liability could also be assessed against Donnelly personally.
For now, we wait to see whether the Court will indeed hold the sole member of the single member LLC liable as well. If so, there goes the protection from a single member LLC in Arizona.
What Does This Mean For the SMLLC?
We’ve now had several cases at the state level which seem to over-reach to the owners of a SMLLC. Primarily, these cases are in Florida, Arizona and Colorado. After a significant Florida case, the legislature decided to do away with that protection for single member LLCs all together. But it did strengthen the protection with a multi member LLC.
In Colorado and Arizona? It’s hard to say how this will end up.
The safest strategy is to use the old stand-by of a limited partnership or a multi member LLC. If you want a SMLLC, make sure you hire an attorney in your state to determine what liability there could be based on current cases.
As much as I’d love to tell you that this blog is the be all and end all for single member LLC liability, I can’t. There could be a case tomorrow that changes everything.
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