Piercing the Corporate Veil
To pierce the corporate veil is to hold a corporation’s directors or shareholders personally liable for a corporation’s debts or actions. Normally, limited liability applies to these people. Most states have strong laws that try to discourage against piercing the corporate veil. The idea is that if you hold the shareholders or directors responsible, it may prevent company owners from taking risks. While this may be true in some instances, there are ways around these rules when a company engages in an egregious action.
Circumstances Behind Piercing the Corporate Veil
If you provide goods or services to a company, then you expect payment. Normally, if you are awaiting payment, you will consider suing the business for payment. What happens if that business is defunct or has no assets? In this case, you may feel like you have been cheated out of your services. If you have luck, then the business may have some assets that they plan to put towards starting a new corporation. If you have to, you can pierce the corporate veil and access the owner’s assets.
How to Pierce the Corporate Veil
LLCs and corporations are distinct from the people who own them. One of the major advantages of forming a corporation is to take advantage of the fact that the business is a separate legal entity. This means that the owners have limited personal liability when it comes to company debt. In the right circumstances, however, a court will ignore the fact that the owners have limited liability.
Courts may decide to do this if the owners of the business fail to maintain a separation between themselves and the business. This usually occurs if the owners and shareholders don’t keep their finances separate from the business. If a person pays his or her personal bills from the company’s accounts, then the court may ignore the fact that they are a corporation for the sake of settling debts. In addition, if the corporation is recklessly borrowing or making business deals with the awareness that they cannot pay them off, then the financial fraud may make the person accountable.
When it comes to piercing the corporate veil, most courts do not want to have to hold shareholders or directors accountable for business debt. When you form a corporation or an LLC, this is usually the protection that you have. However, it does not give corporations the ability to behave recklessly or fraudulently without being held accountable. If you are in the middle of a case where piercing the corporate veil seems likely, contact a business lawyer in Memphis, TN as soon as possible.
Thanks to Patterson Bray, for their insight into business law and piercing the corporate veil.