Corporations and limited liability companies (LLCs) are legally separate entities, distinct from their corporate shareholders and LLC members. As a result, the people who own or manage the business cannot typically be held liable for its debts.
This immunity is not without limits, however: if a creditor sues for nonpayment of a debt and certain circumstances are evident, a judge could “pierce the corporate veil,” or order the company owners, members, or shareholders to pay the debt themselves.
When the corporate veil is pierced, creditors can go after the assets of the owners / shareholders to satisfy any debts. As a general rule, courts impose personal liability on the parties who are directly responsible for any unethical or fraudulent actions. Owners or shareholders who were unaware of the wrongdoing will not be held liable.
Situations that might result in a piercing of the corporate veil include:
- A lack of formal legal separation between the business and its owners: If no real separation exists between an owner’s personal and business finances, a judge may conclude that the corporation or LLC is just a personal extension of the owner. Examples include paying personal debts using company money.
- Not enough capital to make the company self-sufficient: If the corporation or LLC did not have enough money to operate, it was technically never a separate and independent entity.
- Fraudulent or unethical company actions: A court may decide that financial fraud is evident if company owners use company funds recklessly or order items knowing that the business cannot pay the invoices.
- Creditors suffer an unfair cost: If a company creditor is left with a financial burden such as unpaid bills or even a court judgment due to company misconduct, a judge may decide that piercing the veil is warranted.
- Failing to observe required corporate formalities: If a company does not comply with the rules governing the formation and running of a corporation or LLC, a judge may dispense with the protections these company structures normally represent.
Piercing the veil happens more often with closely held corporations or small LLCs. Unlike their larger, publicly traded counterparts, closely held corporations and small LLCs are less likely to observe corporate formalities and more prone to mingling personal and business assets. To avoid future problems, smaller companies should follow all the correct protocols of running a corporation or LLC.
A Florida corporate lawyer can help corporations and LLCs establish and maintain the requirements and formalities that make them less susceptive to a veil piercing. Call the Trembly Law Firm at (305) 431-5678 today to schedule a consultation.