Incorporating a business means that you and other business partners, owners, or members have created a corporate entity that is separate from your assets and finances. Internal and external stakeholders may bring lawsuits against the business; any judgments resulting from those lawsuits will be held against the company and not your own assets. This corporate veil that divides you and the business is an attractive feature of corporations and limited liability companies (LLCs).
Owners are not completely protected in all cases, however. Circumstances sometimes call for piercing the corporate veil and pursuing an owner’s personal assets or money for business debt or judgment. Specific conditions must exist for the corporate veil to be pierced in Florida.
Alter Ego or Mere Instrumentality
Case law in the Florida courts have molded the standards necessary for piercing the corporate veil. One important component that must exist is that the company must be shown to be an alter ego of the owner/wrongdoer. In other words, the corporate entity was not independent of the wrongdoer and instead simply existed as an extension of the owner.
One common way that a company becomes an alter ego of an owner is by the owner commingling personal and business funds. For instance, an owner might pay for a personal meal or vacation through company money. Shareholders and employees of a company must be paid a certain way, regardless of whether a shareholder or employee is also the owner.
Another red flag that could signal an alter-ego situation is the owner not having a separate bank account for the business. Not following corporate formalities, such as failing to hold regular board meetings or file required documents, also works against the business owner. Inadequate capitalization of the company can also be used to demonstrate the alter ego component.
Improper Purpose or Conduct
After it is established that a corporation or LLC is merely an alter ego of the owner, the plaintiff must show that the owner acted improperly. This is typically more difficult than satisfying the alter-ego component. One way that plaintiffs can show that is by proving that the company was formed for some ulterior purpose and not to make money for shareholders. Misleading shareholders and creditors can also help establish improper conduct on the part of owners.
Forming an LLC or Corporation is the First Step
Deciding to incorporate your business can be an important way to grow the company while providing you with increased protection. Simply starting an LLC, though, isn’t enough to warrant those protections. You have to maintain the company and fulfill certain obligations to ensure your LLC is actually working for you. Trembly Law Firm can help you get there. Call us at (305) 431-5678 to see what we can do for you.