A Few Tips To Avoid Piercing Of the Corporate Veil
A fundamental rule of corporate law is that, normally, shareholders, officers, and directors are not liable for the debts of a corporation. The concept that a corporation is a legal entity, separate and apart from the natural persons who compose it, is a legal fiction designed to facilitate the transacting of business. However, when the corporate form is used to subvert the intent and policy of this fiction, it may be disregarded. This disregard of the corporate form is known as Piercing the Corporate Veil.
The Supreme Court of Ohio has set forth the elements to pierce the corporate veil as follows: The corporate form may be disregarded and individual shareholders held liable for wrongs committed by the corporation when (1) control over the corporation by those to be held liable was so complete that the corporation has no separate mind, will, or existence of its own, (2) control over the corporation by those to be held liable was exercised in such a manner as to commit fraud or an illegal act against the person seeking to disregard the corporate entity, and (3) injury or unjust loss resulted to the plaintiff from such control and wrong. The burden of proving that the corporate veil should be pierced lies with the party seeking to hold individual shareholders liable.
The factors to be considered in determining when the above principles should be applied include the observance of corporate formalities, undercapitalization, fraud, and the result of unjust or inequitable consequences in the event the corporate fiction was retained. As a business owner, here are some tips for you to avoid the “piercing of the corporate veil:
Run the corporation like a distinct entity from the shareholders personally and from any other parent or subsidiary corporation. Basically, do not treat the corporation as your alter ego or merely a shell for the parent corporation.
Ensure that each corporate entity is held out to the public as a distinct and separate legal entity. The stationery, business cards, purchase order forms, invoices, checks, contracts and such other documentation should include the full legal name of the entity.
Each corporate entity should have its own bank accounts, own or lease its own equipment, and if possible, maintain separate offices.
Pay federal and state income tax and sales taxes.
When signing your name, ensure that you make it very clear whether you are signing individually, as an officer of the parent corporation or as an officer of a subsidiary corporation.
Follow all corporate formalities i.e. have and observe bylaws, minutes of shareholder and board of director meetings and actions. If you do not know what corporate formalities to observe, please call Wood & Lamping. Some major points to remember are:
i. Read and fully understand the Articles of Incorporation or Articles of Organization.
ii. Read and fully understand the Operating Agreement.
iii. Read and fully understand the by-laws
iv. Hold regular meetings and maintain minutes.
v. Ensure that all filings required by law are completed on time.
vi. Use corporate resolutions to authorize and document all major corporate acts.
Avoid inadequate capitalization. A corporation is inadequately capitalized at the time transactions with creditors or others wishing the corporate veil to be pierced were entered, or simply not enough capitalization to get the particular corporation running.
Maintain corporate records.
Ensure that unemployment insurance, social security withholding and such other items are paid on time.
Maintain arms length relationships with related entities.
Officers, shareholders or directors of the corporation must avoid criminal acts.
Do not commingle funds. Never put corporate money for personal use such as paying home mortgages or buying gifts for self or family members. Related entities must also avoid commingling funds.
Do not treat corporate property as your own.
Do not mislead vendors, customers and other affected people regarding the solvency of the companies or the financial wherewithal to perform on contracts.
Consider creating resolutions for major subjects such as:
i. Compensation of officers
ii. Authorization of important contracts
iii. Acquisition of property
iv. Loans and guarantees
v. Designation of banks
vi. Engagement of lawyers, accountants and other professionals
vii. Declaration of dividends
viii. Approval of mergers
ix. Issuance of shares
x. Sale of assets
xi. Authorization to sign checks, deposit funds, and make withdrawals
xii. Approval of financial statements and audit reports
xiii. Compliance with governmental regulations
xiv. Adoption of employee benefit plans
About: Rayan F. Coutinho is an attorney with the Business Group at Wood & Lamping LLP and can be reached at rfcoutinho@woodlamping.com or (513) 852-6030.
admin @ November 19, 2008