The world of business litigation is filled with laws and rules that intertwine throughout every instance of a dispute. Many times, owners of businesses and companies believe they are protected through limited liability and their assets are untouchable. But there are times they can be personally liable for the actions of their company.
So, what is the definition of “piercing the corporate veil”? Piercing the corporate veil is legal jargon describing the actions pursued against a company that in the end leads to personal liability of the members, owners, or shareholders where the corporate structure is not taken into account. The personal liability makes it possible for the members, owners and shareholders bank accounts, investments, and real or personal property at risk. You could put it like, the corporate structure acts somewhat as a “veil” that will provide them protection. And, if that veil is pierced, there is no longer any more protection.
Reasons why the Corporate Veil Would be Pierced
There is no particular equation for the number of factors that need to be shown to pierce the veil (most cases there are three to five present), but there are some that will draw more attention then others. These would be:
The existence of fraud, wrongdoing, or injustice to third parties.
Out of all the possible factors the courts could look at, the presence of fraud, wrongdoing, or injustice to third parties is the largest determining factor on whether or not they will pierce the corporate veil. In most instances, the claimant is looking to pierce the corporate veil because of the illegal behavior conducted by either the company, shareholders, or it’s owners.
Failure to maintain the separate identities of the company
An example of this could be where there are several related companies or affiliates performing under the same umbrella of one company, and fails to maintain separate identities of the companies. The Parent company will control and operate the subsidiary, provides all the cash flow for them, appoints the same officers as theirs, corporate address, and even corporate information. Then try to file for consolidated taxes with the subsidiary, see where this might be wrong?
Failure to maintain separate identities of the company and its owners or shareholders.
This factor is similar to the point made above, but instead of intertwining with the other companies it does so with the shareholders or owners. An example of this might be when an owner of a company uses the companies assets as their own personal assets.
Failure to sufficiently capitalize the money
This is essentially where a busines owner will open a business and use their own personal bank account to fund it. They have the hopes that they will turn a profit and put more money back into the business. This behavior is just too risky and endangers your corporate liability shields.
Failure to follow corporate formalities
Lastly, the final big factor that could lead to a piercing of the corporate veil is failure to follow the corporate formalities. In the situations where corporate formalities are failed to be followed, the courts will side with the shareholders. They say that once this occurs the legal liability protection of the shareholders were waived and the owners personal assets could be reached by the claimant.
Piercing the corporate veil is not easily described in one sentence. These actions by business owners, shareholders, and members of the business or corporation are risky and should not be performed. If you own a company and believe you might fall under one of the above categories or the many others that are out there, you should contact a business lawyer. They can help you figure out your legal options to see if you were in fact committing one of these red flags. Furthermore, they can help you prevent these actions before they even occur. Sometimes, business owners are so focused on running the operations they fail to see these things happening right before their eyes. If you hire a business lawyer, they can help consult you on some legal aspects of your business that might put you at risk. Call a business lawyer today to see if they can help.