22 J. Corp. L. 131 (1996-1997)
Piercing the Veil of the Limited Liability Company, from Sure Bet to Long Shot: Gallinger v. North Star Hospital Mutual Assurance, Ltd.

handle is hein.journals/jcorl22 and id is 141 raw text is: Piercing the Veil of the Limited Liability Company, from
Sure Bet to Long Shot: Gallinger v. North Star Hospital
Mutual Assurance, Ltd.
Shaun M. Klein
I.  INTRODUCTION   . ...........................................                   131
II. BACKGROUND ............................................. 135
A. The Doctrine of Piercing the Corporate Veil .................... 135
B. Application of Corporate Rules to LLCs ....................... 137
C. Minnesota Law .......................................... 139
III. OPINION OF THE GALLINGER COURT .............................. 141
A. Facts ................................................. 141
B. The Eighth Circuit Decision    ............................... 142
IV. ANALYSIS OF THE COURT'S DECISION        ........................... 143
A. The First Prong ......................................... 143
B. The Second Prong ....................................... 145
1. Special Knowledge of Material Facts ...................... 146
2. Fulfilling Bona Fide Purposes ........................... 147
C. A Liability-Free Form? ................................... 148
D. The Need for Legislative Guidance     .......................... 150
V.  CONCLUSION   ..............................................                    151
I. INTRODUCTION
The limited liability company (LLC) is a relatively new entity from which to
choose when starting up or reorganizing a business. Having evolved in the last twenty
years,' the LLC is a hybrid business entity. All owners, called members, enjoy limited
1. Only two states had adopted LLC statutes prior to 1990, although similar entities were common
internationally (e.g., the Brazilian limitadas, the German Gesellschaft mit beschraeukter Haftung, and the
Portuguese sociedate por quotas responsibilidade limitada). Wyoming enacted the first Limited Liability
Company Act in 1977 (WYO. STAT. § 17-15-101 (1989)), followed by Florida in 1982 (FLA. STAT. ANN.
§ 608.401 (West 1993)). Only these two states had passed LLC legislation before the Internal Revenue Ser-
vice (IRS) ruled that limited liability would not preclude the entities from taxation as partnerships. See Rev.
Rul. 88-76, 1988-2 C.B. 360.
Following the IRS ruling, many states enacted LLC legislation. Between 1990 and 1992, 17 states
passed LLC statutes. After this flood of state LLC legislation, the IRS again considered whether several
states' LLCs should be taxed as corporations or partnerships. It concluded that LLCs would be treated as
partnerships for tax purposes unless the relevant state LLC statute contained provisions allowing the LLC to

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