Importance of your CORPORATE (LIMITED LIABILITIY CO.) VEIL
Often times when attending a cocktail party or other business social event owners of businesses will hear stories about ‘Piercing the Corporate Veil’, and how easy the same is to accomplish for a particularly aggressive Trial Lawyer.
Since such a piercing could result in a total collapsing of your corporate (LLC or other Limited Liability) with resulting personal liability of you and your co-sharehholders being liable for the debts and liabilities of the corporation and or LLC, it is important for any business owner, operating under a corporate or other limited liability entity to be aware of the pitfalls that should be avoided in order to avoid such ‘Piercing’.
The purpose of this article will be to just very basically familiarize the business public to the concept of piercing the corporate veil and what one needs to do in order to avoid the so-called piercing of the veil, the upshot of which is to let a plaintiff/ complainant through your business shield- the corporate veil , and to allow that person making the claim, upon securing a judgment, to not only pursue your business assets in satisfaction of his/her judgment , but also to pursue your personal assets to satisfy the judgment as well. Properly guarded against the business owner should be able to prevail in upholding his/her business veil, if and when subjected to the inevitable claim.</p >
Ok, so, what are the most worrisome facts that could subject your business to claims for ‘piercing the corporate veil’?
Often times it is good, when discussing things that one wants to avoid, to first discuss ‘strawmen’ that many people would say could implicate your company to claims for ‘alter-ego’ / piercing the corporate veil, but which most likely are not the ones with any real grist.
In preparing to write this article, the author has read several articles in combination with this author’s 39 years of practicing law in and around the business arena in order to be able to sort the wheat from the chaff in analyzing this area of the law.
In some of the articles reviewed, the authors indicated that a company and its key shareholders occupying the same leasehold / offices space could subject the owners to such a claim. My response to that assertion generally would be if such were the case a great multitude of companies who maintain the same offices with its key shareholders would be exposed to the referenced type of claim. This author does not share the same view. Coinciding in the same office space is not the touchstone for establishing ‘alter-ego/ piercing the corporate veil’.
Similarly, the referenced author also cited to the fact that there were a small group of key shareholders –again if one uses this as a criteria then there will be a huge number of smaller businesses, whether corporations or LLC’s that will fall into the category- again this author does not feel that this type of fact is outcome determinative.
The factor that the corporation and the key shareholders share the same attorney, is again a very common item in the business world and is really not grist for proving this type of a case unless added to a lot of other much more compelling facts.
FACTS WHICH REALLY MAKE A DIFFERENCE-
Key facts which could support a compelling argument to pierce the veil would be as follows:
- – Where the shareholders use the company funds as though they are their own personal funds; (not properly accounting for the use) such as paying for personal vacations- not business trips; paying personal debts vs. bonafide business debts; paying other personal expenses without properly accounting for taking those monies personally, such as through documentation of a shareholder loan; furnishing one’s home and or apartments with furnishings having nothing to do with the business (again without a proper accounting on a shareholder loan basis);
- – Where the business is set up to procure labor, services and goods for others having no relationship to the business- and without any intent of ever paying the persons providing that labor; those services or those goods ( this is fraud);
- – Or where the business was set up with no good faith intention of running a true business for profit (regardless as to whether or not a profit was made) i.e. as a shill, to hide behind, and to dodge creditors of the ‘business’ , which creditors had been misled into believing there was a legitimate ongoing business from which their they would receive money for that labor, those goods , and or those services;
- – Where the business was set up, but none of the necessary ongoing formalities are maintained; maintenance of stock journal evidencing ownership; organizational and ongoing corporate minutes and tax returns;
- – Any and or all of the above would support arguments against your company in an attempt to ‘pierce it’s corporate’ veil and then as a result hold you and or your co shareholders responsible (liable) for the debts of that judgment creditor whether for goods, services, or coincidental to damages arising from some other uninsured event caused by the business and or its employees.
- Another area where one can have vulnerability to the ‘veil being pierced’ would be when it can be established that the business is undercapitalized. The capitalization analysis depends heavily on the type of business undertaken, the risks undertaken, the insurance purchased or not purchased to cover the risks undertaken and many other complicated analyses. Undercapitalization, will be the subject of an entirely separate article in this firm’s blog.
As the reader/listener can (see/hear) the subject area of ‘piercing the corporate veil/ alter ego’, even at a very fundamental stage is an entangled web.
This area of exposure to the businessperson can be ruinous to one’s personal estate if liability arises in the business but the businessperson has not taken the correct steps to insure strong maintenance of the corporate shield.
This type of analysis is not offered on ‘rocket lawyer’ or legalzoom.com; one really needs to have his/her lawyer review the proposed business; consider proper capitalization; review the initial compliance with set up formalities as well as develop a plan for ongoing formalities; review the type of liabilities to which the company can be exposed and the need to take certain steps to keep that liability within the envelope of the corporate universe.
Our firm, as part of our legal corporate or LLC, or any other Limited Liability entity offer a memorandum of general recommendations as part of every set up package and we underscore that all of the startup documents are important but that this particular memorandum is the one document the owners cannot afford to ignore.
Steven H. Wilhelm
The above article and discussion is general commentary on legal issues. Each situation is different and this article is not legal advice and nothing within this article nor any other publication of this firm’s blog are intended to create an attorney- client relationship with the reader.