Piercing the corporate veil is an extreme step courts will take only when a corporation is a sham. Courts undertake a delicate balancing act to not disturb the corporate structure while simultaneously impressing upon business owners the importance of abiding by corporate formalities. Piercing the corporate veil refers to the act of a court piercing through the corporate structure to expose personal liability on its owners.
A court will use several factors to determine whether corporate piercing is appropriate. Chief among these are commingling of assets, history of mismanagement, failure to maintain adequate records, and stripping the corporation of assets. The reasons these factors weigh heavily are because they signal that the owners of the corporation are merely using it as a sham cover-up, attempting to utilize personal liability without fulfilling corporate obligations.
There are both pros and cons involved with the traditional corporate piercing. It fosters efficiency by ensuring the corporation is run smoothly, encourages investment by providing assurance that corporate structure will be respected, and facilitates risk-taking and market participation. However, it also poses moral hazards, discourages credit extension, and may result in insider opportunism, risk externalization, and shareholder irresponsibility. Historically, piercing has occurred more often in tort suits than in contract suits.
Several alternatives to piercing the corporate veil have been proposed that would not disturb the corporate entity itself. These include insurance requirements to protect outside creditors, minimum capitalization requirements to demonstrate the corporation’s commitment to maintaining itself, pro rata liability to diffuse shareholder liability, and voluntary insurance to cover potential losses.
Corporate law is complex, and many may not realize that even under current corporate statutes, owners can still face personal liability. Understanding the conditions under which a court might pierce the corporate structure is crucial for the smooth and efficient running of your corporation. Consulting with an experienced legal team can help you assess how well your corporation is managed. Call the Trembly Law Firm at (305) 614-3219 to schedule a consultation.
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