States have similar laws for failure to pay withheld sales taxes. Several instances in which the corporate veil might be pierced by a court, removing the limited liability protection, include:. The ability of a business owner to use the protection of the corporate veil varies from state to state.
Most states uphold the concept of the corporate veil unless the business owner has plainly abused this protection. In Florida, for example, two factors must be present to pierce the corporate veil:. Meanwhile, Alaska's state Supreme Court considers the piercing issue only when there is some control or connection to the corporate form and only where there is "misuse" misconduct.
Texas courts, on the other hand, will pierce the corporate veil when owners intend to use the company for fraud for the direct personal benefit of the person. Evaluate your activities in relation to your business. Make sure you don't have any overlap between your business and personal activities. Make sure you are keeping all your corporate records correctly and in a timely manner. If you have a board of directors, consider a conflict of interest policy to be signed by all members.
Better yet, have your attorney review all of the connections between owners including shareholders and business activities. General partners in partnerships who participate in manage the business don't have limited liability; there's no corporate veil in these situations. Limited partners and partners in limited partnerships have the same limited liability as corporations, and violations that pierce the corporate veil are handled the same way as for corporations. Because corporations and other business entities are set up as state entities, many cases involving piercing the corporate veil are in state courts.
If the owners failed to actually maintain the business as its own separate entity, the corporate veil must be pierced. Under these circumstances, the business and owners were really one-in-the-same and should be treated as such. The actions of the owners were fraudulent or wrongful.
Phone This is just a sample of situations that could justify piercing the corporate veil. Fraud can involve any actions where you mislead someone for the purpose of benefiting yourself. As a result, the LLC is unable to meet its financial obligations and defaults on a loan.
The lender attempts to collect a judgment but finds that the LLC has no assets. Since the members undercapitalized the LLC and siphoned funds to avoid liability, the lender may argue that the veil should be pierced to prevent them from suffering an unjust loss. One of the most important steps you can take to protect your LLC from corporate veil piercing is to observe important formalities in your business. Be sure to:. But doing so can be costly and may deprive you of the liability protection an LLC should give you.
The sophisticated business law attorneys at the Miller Law Firm have spent nearly 25 years serving businesses in Michigan and around the country. Examples of this are engaging in business deals with the knowledge that the Company could not pay, or recklessly borrowing and losing the borrowed money.
Because of the above factors, smaller corporations and LLCs are at greater risk of piercing than larger or publicly traded companies. So, what can you do to reduce or eliminate the risk of a future piercing of your corporation or LLC?
If you are concerned about protecting your business and your personal assets from future creditors and predators, contact us at or email [email protected] to schedule a meeting for a review of your corporate practices and governing documents. Were there only a small number of closely rated people or one person in control of the company?
Did the company owners fail to follow a corporate formality?
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