One main reason business owners and managers choose to form a corporation or limited liability company (LLC) is so they will not be held personally liable for debts if the business becomes unable to pay its creditors. In some cases, courts will still hold an LLC or corporation’s owners, members, and shareholders personally liable for business debts. When this happens it’s called “piercing the corporate veil.”
The most common factors that courts consider in determining whether to pierce the corporate veil are:
- There is no real separation between the company and its owners. If the owners do not maintain a formal legal separation between their business and their personal financial affairs, a court could find that the corporation or LLC is really just operating under false pretenses and could further find the owners are personally operating the business as if the corporation or LLC didn’t exist. For example, if the owner pays personal bills from the business checking account, or making business decisions without the LLC required formalities such as: holding annual meetings, adopting by laws, or keeping meeting minutes. A court could decide that the owner isn’t actually a limited liability that the corporate business structure would ordinarily provide.
- The company’s actions were intentionally wrongful or fraudulent. If the owner or owners purposely borrowed and lost money, engaged in business deals knowing the business couldn’t pay the invoices, or intentionally acted dishonestly, a court could find financial fraud was committed and that the limited liability protection doesn’t apply.
- If someone who did business with the company is left with unpaid bills or an unpaid court judgment and the above has occurred, a court will attempt to correct this unjust behavior by piercing the veil.
If you are part of a corporation or LLC, the following steps can be taken to ensure that a court won’t pierce your corporate veil:
- Comply with formal rules for forming and maintaining a corporation or LLC.
- Create and pay bills from a separate bank account for the corporation or LLC.
- Never commingle personal assets with the corporation or LLC.
- Never use corporate or LLC assets for personal use.
- Make a reasonable initial investment in the corporation or LLC so there is adequate funds available.
- Never tell a creditor that you will personally guarantee payment of the corporation or LLC’s debts.
- Never use the corporation or LLC to engage in an illegal or fraudulent behavior.
Contact A Legal Representative
If you should find yourself in a business dispute that requires litigation, I can help. At the Robert R. Robles Law Firm, I have provided aggressive and effective representation to clients throughout Oklahoma, and would love to speak to you about your case today. Take advantage of my extensive knowledge and experience by calling (405) 232-7980 today or contact us online today.