Limited Liability is Not Lost When a Foreign LLC Fails to Qualify to Transact Business

 Limited Liability is Not Lost When a Foreign LLC Fails to Qualify to Transact Business

In Schneider v. Buttermilk Shopping Center, LLC, No. 2024-CA-1036-MR, __ S.W.3d __, 2024 WL 2679049, 2025 Ky. App. LEXIS 77 (Ky. App. Sept. 19, 2025), a recent decision of the Kentucky Court of Appeals, reversed the trial court’s determination the sole member of a foreign (Ohio) LLC did not enjoy limited liability when the LLC transacted business in Kentucky without having first qualified to transact business.

Velvet Smoke BBQ, LLC, an Ohio LLC, leased space in Cresent Springs, Kentucky from Buttermilk Shopping Center, LLC from which it operated a restaurant.  Velvet Smoke was owned by Matthew Schneide; he guaranteed the obligations under the initial but not subsequent terms.  While it was clearly transacting business in Kentucky, Velvet Smoke never “qualified” to transact business in Kentucky. See KRS ch 14A.9. The restaurant went under during a renewal term, and Buttermilk sued to collect monies owed under the lease.

On summary judgment the Kenton Circuit Court held that Schneider did not enjoy limited liability as to the debts and obligations of Velvet Smoke because it never qualified to transact business in Kentucky. In doing so it relied upon KRS §275.095, it providing, inter alia, that a person purporting to act on behalf of a non-existent LLC or outside the scope of their actual authority to act is personally liable on the debts and obligations that arise.  Bear in mind that this statute simply repeats and codifies existing agency law. 

This determination was reversed by the Court of Appeals, it parsing the provisions as to the requirement to qualify and the statutory imposed consequences thereof (a per diem fine and no ability to initiate and maintain an action in Kentucky’s courts) as well as the effect of qualification, one of which is that Kentucky may not consequent thereto regulate the internal affairs of the foeign organization, a set that includes limited liability. It held as well that KRS § 275.095 was not applicable as Velvet Smoke did validly exist as an Ohio organized LLC.

Curiously, the Court of Appeals (perhaps because the question was not addressed by the Circuit Court below) did not investigate the Ohio LLC Act to determine whether it provided Schneider limited liability when acting outside of Ohio. BTW, it does. See Ohio Code § 1706.26

For more on the consequences of a failure to qualify to transact business, see Thomas E. Rutledge & Laura H. Pulliam, Qualification to Transact Business in Kentucky, § 12.04, in Kentucky Business and Commercial Law (forthcoming 2025).

The decision goes on to review the manner in which the landlord applied certain sums between the first least term on which Schneider was a guarantor and the subsequent renewal term for which he was not a guarantor.