Corporations have plenty of advantages. Chief among them, and a big reason why many incorporate, is being shielded from personal liability. No creditor or plaintiff can ever come after the incorporators’ personal property. However, little do some business owners know, the protection from personal liability in a corporation is not absolute. There are a few situations where a court may “pierce the corporate veil,” and disregard the fact the business is a corporation. In such a situation, the court will attach personal liability to the business owners. Here are the three main such situations where this could occur:
Alter Ego. One such situations where courts will pierce the corporate veil and attach personal liability is where the corporation is truly an alter ego of another company or, based on a totality of circumstances, finds that the corporation is merely a fraud. In an effort to shield themselves from personal liability, many incorporators skip the proper steps and attempt to set up a corporation for the sole purpose of protection. This may occur where an incorporator sets up subsidiaries of a parent company simply to avoid attaching the property from the parent company. Alternatively, it may occur when there is insufficient funding. Depending on the circumstances surrounding the incorporation, a court may find that the corporation is an alter ego of the incorporator or another company, and attach personal liability.
Not Following Corporate Formalities. If a corporation does not follow the formalities necessary as enunciated by the state, courts may attach personal liability. Setting up a corporation requires several steps. Requirements include following state laws, filing the proper paperwork, and paying the proper fees. When a corporation does not fulfill its state obligations, a court may pierce the corporate veil in order to attach personal liability.
Commingling Personal Funds. A corporation must remain separate from its owners in all aspects. All too often, a corporation is formed with insufficient funds, and the incorporators will commingle the little funds that the corporation has with their own funds in order to keep the corporation afloat. This is a terrible mistake. Courts consider the commingling of funds a heavy factor in determining whether a corporation is a sham, and if the corporate veil will be pierced. Do not, under any circumstances, allow for the commingling of personal and corporate funds, as it is perhaps the most easily avoidable situation of corporate piercing.
There are just three of the many scenarios where the courts may “pierce the corporate veil” and attach personal liability. Once the corporate veil is pierced, business owners risk subjecting their personal property to liability in any number of lawsuits. Do not allow your corporate veil to be pierced. Ensure your corporation is protected and consult with a business lawyer. Call the Trembly Law Firm at (305) 431-5678 today to schedule a consultation and see if we can help.