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(Context: This question is about US law). Let's say an LLC has two owners and it makes 300k a year in profit. The owners each pay themselves a (reasonable) 150k salary each year, leaving the assets of the LLC itself 0.

In the event the LLC is sued, can a court pierce the corporate veil and go after the salaries that the owners paid themselves? If I understand correctly, it would have to justify that by saying the owners used the LLC as their personal bank account, with the intent to shield the money from lawsuits. But in this case the salaries are reasonable amounts, so how can the court prove illegal intent? In general, is there a maximum salary the owners can collect from an LLC before it's considered as 'shielding funds'?

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If your LLC made 300K before paying salaries, and paid 300K total in salaries, that seems quite reasonable. You might have a point if the order of events was: LLC pays 100K in salaries, LLC gets sued for 200K, LLC raises salaries by 200K.

Note that the owners have to pay income tax on 300k earnings, plus whatever else employers and employees have to pay. And an LLC doesn't pay salaries to owners, it pays salaries to employees who be sheer coincidence are also owners.

It's a different matter if the company pays dividends. A company must keep dividends low enough so that it can run its business, including paying damages for lawsuits that it knows about. So if the company planned all along to pay 300k in dividends, then is sued for 200k, they likely have to reduce the dividends.

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  • Thank you for the answer! It seems like a good strategy for an LLC (or even a bigger corporation) to avoid exposing assets to a potential lawsuit can be to keep the corporate assets (both cash and illiquid) as minimal as possible - by let’s say as in this example having maximal salaries to co-owners or by paying out large dividends. Is this actually practiced in the real world?
    – cdog1351
    Mar 17, 2023 at 16:02
  • Note that if your limited company is profitable beyond normal salary payments, then paying out large salaries and dividends has tax consequences. For a potential lawsuit you would get insurance. For a real lawsuit, as soon as you know there might be a lawsuit trying to remove money might not work.
    – gnasher729
    Mar 18, 2023 at 1:02
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The legal standard for a fraudulent transfer is typically what it would cost to hire a third-party manager at a current fair market value salary to do the same job. This is also the standard used to distinguish excessively low salaries in S-corporations for FICA tax purposes.

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