What is Piercing the Corporate Veil?
Normally, owners, shareholders, officers and directors of a business are not liable for the debts incurred by the business. However, that protection against personal liability for the debts of your business is a privilege that may be lost if your business affairs are not properly administered.
Specifically, if the corporate form (the coporation or the limited liability company) is abused to perpetrate a wrong or injustice against a third party or is a mere front for your personal affairs, courts in some states may hold the individual corporate actor personally liable for the debts of the business. If the proverbial corporate veil is pierced the personal assets of the owners or shareholders can be reached to satisfy a judgment of the business.
The highly fact-specific inquiry for this complex business law doctrine hinges upon the connection between the business and the individual. Often courts will pierce a corporate veil is the individual “so dominated the [corporation] that it had no separate existence but was merely a conduit for the [individual].”
When is the Corporate Veil Pierced?
The parties seeking to pierce the company veil have the burden of establishing that the company form should be disregarded. Some factors that courts will consider in this inquiry include:
- Whether corporate formalities were disregarded, including failing to hold annual meetings, maintain corporate records such as resolutions and minutes, or otherwise failing to follow the formalities set forth in the corporation’s bylaws or the limited liability corporation’s operating agreement;
- Whether the corporation was adequately capitalized;
- Whether company funds or property were comingled with owner’s personal assets;
- Whether there is overlap in ownership, officers, directors and personnel of the corporation (if trying to hold one corporation or LLC liable for the debts of another);
- Whether the corporation and owner share office space, address and telephone numbers (if trying to hold one corporation or LLC liable for the debts of another);
- Whether decisions were made in the corporation’s best interest, as opposed to its owner's personal agenda;
- Whether the corporation is treated as an independent profit center and extended personal account of its owners; and finally
- Whether the owners pay or guarantee debts of the corporation
How Do I Avoid Being Personally Liable for My Business' Debts?
While courts are generally hesitant to pierce the corporate veil for legitimate businesses, there are some best practices that every business owner can follow to decrease the likelihood of a court holding him or her personally liable for the debts of the business.
Run Your Business Properly - Follow Corporate Formalities!
Bylaws and Operating Agreements. Draft, adopt, and abide by a set of bylaws or an operating agreement which directs how the company will be managed.
Create a Separate Identity for Your Business. Create a letterhead, business cards, and a website for the business and clearly indicate that the business is a corporation or a limited liability company. Create a separate phone number, email address, and office address for the business. Create an email signature and a voicemail that clearly identified the business name which always incudes “Inc.” or “LLC.”
Conduct all business with third parties in the name of the corporation of the LLC. For example, all agreements should be entered explicitly in the company’s name. That includes signing a document “on behalf of” the company and including your title at the company.
Document Ownership. Issue formal certificates reflecting each owner’s stock holdings in a corporation or membership percentage for an LLC. Maintain a formal ledger of these certificates.
Meet and Document. Hold regular (annual or semi-annual) meetings of the company board of directors/shareholder or the LLC’s members. Have a corporate secretary take minutes. Draft and sign formal resolutions for all major decisions of the business. Maintain the resolutions, minutes, and records of all other major transactions. Document all other major business actions, including agreements with third parties, and retain them for at least seven years.
Filings, Taxes. The business should file all appropriate federal, state and local tax returns and pay taxes when due, as well as obtain all necessary permits and licenses. Consider setting up a bookkeeping account (like QuickBooks) for the business to make tax filings a bit more streamlined or hire an accountant or bookkeeper.
Keep Your Business Adequately Capitalized and Separate From Your Personal Finances
- Make sure your business has sufficient capitalization. Make sure your corporation or LLC has sufficient funds to operate. However, do not personally guarantee the debts of the business.
- Do not comingle personal and business funds. Keep your and your businesses finances separate!
- Set to set up a bank account for the business
- Set up a credit card for your business
- Use the credit card for business expenses only and pay off the card using funds from your company’s operating account
- Do not use personal funds to pay off company debts. If the business needs capital, be sure to properly document it as a loan (albeit in a promissory note or loan agreement) or capital contribution that is formalized in writing and agreed to by all other shareholders and owners.
New York New Jersey Business Lawyer Russo Law LLC Can Help
Call 929-262-1101 or schedule a free case evaluation today with New York and New Jersey business lawyer Russo Law LLC.
Russo Law would be happy to help structure your business and contracts so you can avoid being held personally liable for the debts of our business and help you resolve any New York and New Jersey business disputes.