This will be a multi-post blog entry. This second post discusses certain circumstances when courts may not uphold the liability shield of LLCs or corporations but pierce it to hold the owners liable.
Post 2 – Piercing of Corporate Veil
Although corporations and LLCs generally provide their owners (shareholders and members, respectively) a liability shield from business debs, certain factors may compel the courts to “pierce the corporate veil” to hold the owners, officers, and directors of the Business personally liable. So when might this happen? This blog looks at a few, but not all, common situations.
Fraud: Businesses often enter into contracts with various third parties in the regular course e.g., for supply of materials or to avail of loans for Business operations with suppliers, vendors and banks. If the court finds that owners engaged in reckless or dishonest conduct or activity in the process of business dealings (e.g., where owners knew the Business could not pay its bills, or if loans were availed with the intention of misappropriating funds and avoiding repayment), the court might pierce the corporate veil and hold the owners and officers liable, because not doing so would lead to unjust enrichment for the owners at the expense of the harmed person.
No Separation of Business and Personal Funds: Some business owners fail to maintain a formal separation between business and personal finances, which may cause the corporation or LLC to look like the alter ego of the owners. In such situations, the Business might be seen as being operated for the personal benefit of the owners, as if no corporation or LLC existed. For instance, if a business owner pays its bills of personal expenses from the checking account of the business or does not implement legal formalities typically required to be maintained by corporations and LLCs (e.g., not recording minutes of meetings where critical business decisions are made). Such acts might lead to a court piercing the corporate veil holding business owners personally liable.
Our next post will discuss liability of business owners that arises due to inadequately drafted company agreements.
This posting is intended to be a planning tool to familiarize readers with some of the high-level issues discussed herein. This is not meant to be a comprehensive discussion and additional details should be discussed with your transaction planners including attorneys, accountants, consultants, bankers and other business planners who can provide advice for your circumstances. This article should not be treated as legal advice to any person or entity.
About the Author
Shawn McBride – R. Shawn McBride is the Managing Member of The R. Shawn McBride Law Office, P.L.L.C. which helps clients in legal issues related to starting companies, joint ventures, raising capital from and negotiating with investors and outside General Counsel functions. Shawn can be contacted at: (214) 418-0258; firstname.lastname@example.org, or www.mcbrideattorneys.com.
Saurabh Nathany – Saurabh Nathany is a Paralegal at The R. Shawn McBride Law Office, P.L.L.C. Saurabh can be contacted at: (312) 394-9924, or email@example.com.