Piercing The Corporate Veil

Piercing The Corporate Veil

Piercing the Corporate Veil

Piercing the Corporate Veil - Most people incorporate primarily for liability protection. When you form a corporation, limited liability company, or similar business entity, a “corporate veil” is created between your personal assets and your business. When properly managed, corporate veils provide significant personal liability protection against lawsuits, creditors, and other disputes. Without the protection of a strong corporate veil, the risks of doing business can be prohibitive.

However, to prevent Piercing the Corporate Veil you must do more than merely form a business entity and register it with the state. There are a host of ongoing governance requirements and formalities for business owners. If challenged in a lawsuit, IRS audit, or other action, you must be able to prove that you have a bona fide business entity. You will be challenged to show that you have a real business, not just a sham created to dodge personal liability. Protecting business owners by helping them keep the rules of corporate governance. This is to prevent "Piecing the Corporate Veil".

Piercing the Corporate Veil - Officers, directors and controlling shareholders have a general fiduciary duty of loyalty and care which should govern all their corporate conduct. Unless they breach that duty by gross negligence or acts in bad faith, they usually will have no personal liability to third parties.

Third parties have to show personal wrongful conduct on the part of a company official or director to hold them personally responsible, extra-corporate actions which would support application of the legal doctrine known as "Piercing the Corporate Veil."

Under Piercing the Corporate Veil, the corporate form is used to perpetuate a fraud, circumvent a statute, or accomplish some other wrongful or inequitable purpose, the courts may decide not observe the separation of the corporate entity from its stockholders, and it may deem the corporation’s acts to be those of the persons or organizations actually controlling the corporation.

Piercing the Corporate Veil can happen when:

corporate debt is knowingly incurred when the company is already insolvent;
required annual shareholders or board of directors meetings are not held, or other Corporate-Formalities are not observed;
corporate records, especially minutes of directors meetings, are not properly or adequately maintained;
shareholders remove unreasonable amounts of funds from the corporation, endangering its financial stability;
there is a pattern of consistent non-payment of dividends, or payment of excessive dividends;
there is a general commingling of corporate activity and/or funds and those of the person or persons who control the corporation;
there is a failure to maintain separate offices, the company has little or no other business and is only a facade for the activities of the dominant shareholder who is in fact, the corporate "alter ego."

The Alter Ego Doctrine is intended to prevent individuals or other corporations from misusing the corporate laws by the device of a sham corporate entity formed for the purpose of committing fraud or other misdeeds. Alter-ego liability is an extreme remedy, sparingly used or invoked, and always the exception to the rule. However, when the remedy is employed by the court as a last resort to prevent injustice, it can be disastrous for the shareholders of a corporation which expected limited liability.

It is indeed possible to breach the wall of personal liability provided by incorporation, and for your asset safety you should know how such exceptions can occur. If you don't protect your assets, know that your competitors will. Certain acts of directors and officers may be grounds for a company creditor to ask a court to "pierce the corporate veil". For example, if the corporation cannot pay a creditor's proven debt or a court judgment claim, the individuals who own and manage the corporation can be held personally responsible for company obligations, even though they have given no previous personal guarantees.

In order to maintain personal limited liability, it is essential these described actions be avoided. Courts in recent years have found ever expanding reasons to hold directors, officials and shareholders personally liable for corporate responsibilities. Among other activities courts have found that may impose personal liability are improper corporate guarantees of loans or contracts benefitting an officer, timing of the sale of a controlling interest in the company for self-benefit, profiting from inside information, transactions with other businesses which may constitute conflicts of interest, unreasonable loans to company officials, and extension of unwarranted credit.

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Piercing The Corporate Veil