When you create a corporation, limited liability company, or another business structure, you are developing a separate legal entity. One of the main benefits of doing so is that it shields your personal assets from any liabilities incurred by the business. If you do not maintain this separate legal entity properly, however, you can lose that benefit. This process is often referred to as “piercing the corporate veil.”
When a business’s owners use the company as an extension of themselves, they blur the line between their assets and the company’s. In those situations, it can be hard to tell whether it is the company acting or the individual. For that reason, and a few others, the owners could be on the hook for the business’s liabilities, even if they belong solely to the company.
Requirements to Pierce the Corporate Veil
Knowing the requirements to piercing the corporate veil is helpful for business owners who wish to protect themselves from this risk. It is also useful information for anyone who is trying to collect from a business.
The corporate veil may be pierced if the following characteristics are met:
- The corporation is dominated by just one or a few individuals.
- The corporation was not adequately capitalized.
- The business did not follow business formalities, such as maintaining minutes or other corporate records.
- Separate business accounts are not kept, or they significantly overlap with individual accounts.
The court also will consider whether the company owner acted in bad faith and is deliberately trying to avoid liability by using the business as a shield for his or her wrongdoing. The test focuses on the intent of the business owner.
The burden is on the plaintiff, and the hurdle is a high one to overcome. The court recognizes that the concept of piercing the corporate veil is at odds with one of the main reasons that business owners create corporations in the first place—to limit liability to just the corporate assets. Piercing the corporate veil is more likely to occur when there are just a few shareholders.
Getting Help with the Corporate Veil
As a business owner, it is extremely important that you follow corporate formalities so you can avoid issues with a creditor or other person attempting to hold you personally liable for company debts or obligations. As a creditor, it takes significant investigation into the corporation and the business owner to pierce the corporate veil. Integrated General Counsel can be an excellent resource on either side of this argument. Contact us to learn more or to set up an appointment.
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