Avoiding Piercing The Corporate Veil Lawyer

The law considers corporations as legal “people,” separate and distinct from the owners/shareholders. If the corporation incurs debts or liabilities, the owners/shareholders have no personal or individual liability. For example, if a person brings a lawsuit against the corporation, the shareholders cannot be brought into the lawsuit. They cannot be held liable for any legal obligation of the corporation.

This is not true for partnerships. Each partner is fully liable for any debt the company incurs in a partnership. If the partnership does not have enough money to pay a creditor, the creditor can demand that the partners pay the debt out of their personal funds.

A limited liability company (also called an “LLC”) combines the limited liability benefits of a corporation with the management and tax structures of a partnership. Just as with a corporation, the LLC business structure protects members of the LLC from any creditor or legal claims against the company. Creditors cannot seek damages from the individual members if their claim is against the company itself.

While limited liability is a great benefit to organizing your company as an LLC, there are some instances when courts will allow creditors to bypass the company and hold the LLC’s owners, members, and shareholders personally responsible for business debts. This is called “piercing the corporate veil.”

“Piercing the corporate veil” refers to the act of a court in taking away the shareholders’ or owners’ immunity and holding them personally responsible for the debts and liabilities of the LLC or corporation. If a court pierces the corporate veil, it treats the company as if it is not a corporation or an LLC, and a creditor can go after its shareholders or owners to satisfy unpaid debts and other liabilities.

Why Would You Need to Pierce the Corporate Veil?

Usually, an advantage of having an LLC or a corporation is to limit the owner’s liability when it comes to unpaid debts. A creditor trying to sue the company for unpaid debts would normally be limited to a claim against the company’s assets. However, if the company cannot pay its debts, creditors may try to pierce the corporate veil to be able to go after the assets of the company’s owners.

How Do You Pierce the Corporate Veil?

If you have provided goods or services to a corporation or an LLC and have not been paid, you may want to try suing the company for payment. However, if the company is defunct, has closed down, or has dissolved and has no assets, then it may be difficult or impossible to collect payment from the company itself. However, the former company’s owners may still have assets. Piercing the corporate veil to collect payment from the owners may be the next appropriate step.

Courts will consider various factors when determining whether piercing the corporate veil is appropriate. If you find yourself in a situation like this, you may want to discuss the best way to approach the situation with a qualified business attorney. Often, courts will consider:

• Whether the LLC or corporation engaged in fraudulent behavior
• Whether the LLC or corporation failed to follow corporate formalities or company rules
• Whether the LLC or corporation was properly capitalized. If the LLC was not properly capitalized (i.e., if it never had enough funds to operate independently), the court may find that it was not a separate entity with the ability to stand on its own
• Whether one person or a small group of closely related people were in complete control of the company
• Whether owners used personal funds for company expenses or whether owners used company funds for personal expenses

What Happens If the Court Takes the LLC Status of My Company?

If the court determines that the corporation or LLC is a phantom company, the company’s limited liability status may be stripped away. Owners/shareholders of the company can be held personally liable for company debts. The company’s creditors will then have the legal right to sue any

• Owners
• Stockholders
• Directors
• Board members

directly for the payment of company debts. However, the courts may limit personal liability to those individuals who are responsible for the company’s wrongful actions.

Why Would a Limited Liability Status Be Removed from a Company?

When the court concludes, there is no meaningful distinction between a person’s financial obligations and the corporation’s or LLC’s financial liabilities, the company’s corporate veil is destroyed. For instance, an owner may utilize personal funds to keep a business solvent financially, but doing so exposes the owner to personal debt.

How Can I Avoid Piercing the Corporate Veil?

There are several steps that owners, directors, and stockholders can take to avoid losing a company’s limited liability status. Principally, you want to ensure that all business assets remain separate from your personal assets. To do so, pay attention to the money and assets:

• Don’t commingle personal assets with company assets. Business accounts and personal accounts must remain separate, and you must not fund one account with money from the other
• Don’t use the company’s money for personal use. This includes company credit cards or lines of credit. If you are using company money to fund your personal lifestyle, this can create a problem for you if you have creditors seeking to pierce the corporate veil
• Don’t divert company assets into personal accounts. If funds or assets are intended for business use, they must be deposited into business accounts dedicated to the corporation or LLC
• Don’t personally guarantee a creditor payment for company debts. If you give a personal guarantee, this allows a creditor to pursue you directly as an individual for the payment rather than going through the company at all

What Should I Do To Keep My Company’s Limited Liability Status?

There are a few steps that you can take to keep the company’s limited liability status:

1. First, you want to make sure that you make a reasonable first investment in the corporation or LLC so that it is properly capitalized. By doing this, you do not have to continually funnel personal assets into company accounts to keep it funded. This avoids the appearance of commingling of personal and business funds
2. Second, it is a good idea to maintain formal rules when starting and running your company. If you have formal written rules in place when it comes to the finances and procedures of the company, this can serve as a layer of protection when creditors come knocking
3. Third, keeping separate accounts for your personal and business assets is also important. Keeping separate accounts also helps to avoid commingling funds, and you can keep better track (and more easily keep track) of the business’s financials
4. Fourth, make it clear to creditors, other businesses, and customers that the business is a corporation or an LLC. This alerts others working with you that you have limited liability status.

If You Take All Precautions, Can You Still Be Sued For Company Debt?

Owners, stockholders, and directors of the company can be sued for the company’s unpaid debts. However, just because a creditor files a lawsuit does not guarantee their success. If you have acted to protect the company’s independent status, chances are that the court will only allow the creditor to recover what they are owed through company assets.

Do I Need a Lawyer If I am Worried About Piercing the Veil?

If you are a member of an LLC or an owner/shareholder of a corporation and are concerned about keeping your company’s limited liability status. In that case, you may want to consult a qualified corporate lawyer.

A corporate lawyer can discuss your business matters with you and advise on the best way to proceed if you are facing a situation with creditors.