Piercing the corporate veil is a legal concept used when an individual or business entity seeks to hold a corporation’s shareholders or officers personally liable for the corporation’s actions. Typically, a company chooses to create a corporation as its entity of choice because, under the eyes of the law, a corporation’s actions or conduct are legally separate from those of its shareholders and officers.
This means that the personal assets of a corporate officer or shareholder remain untouchable by the IRS creditors and debtors. However, this protection is not a guarantee. In certain circumstances, attaching personal assets to a corporation’s wrongdoings in a lawsuit or a claim may be possible. That’s if, and only if, the shareholders or officers “pierce the corporate veil.“
This legal opinion will explore the concept of piercing the corporate veil, including when it may be appropriate to do so, how the process works, what happens when the veil is pierced, and how to avoid it.
A corporation’s limited liability shield for its officers is one of the most valuable assets of a corporate entity. However, there are times when shareholders or officers abuse this privilege. As a result, the courts will put aside the limited protection and allow shareholders to be held liable for corporate debt, liability, or wrongdoing. In other words, a court will pierce the corporation’s veil of limited liability and hold its shareholders personally responsible for the damage. We will explore the elements attached to piercing the corporate veil, with a focus on Florida law, §2d 1063 (Fla. 5th DCA 2003).
What Does it Mean to Pierce the Corporate Veil?
Piercing the corporate veil is a legal doctrine that allows the courts to disregard the separate legal identity of a corporation and hold its shareholders personally liable for corporate debt or obligation. This is the most powerful tool plaintiffs can use to recover damages from a corporation that has wronged them, allowing them to attach personal assets rather than being limited to the business’s assets.
For the courts to put this protection aside, plaintiffs must show that the corporate officers or shareholders have conducted themselves in such a way that they are undeserving of this protection. Courts are extremely hesitant to pierce the corporate veil, as it’s one of the most extreme remedies available, and it undermines the principle of limited liability at a fundamental level.
What Actions Can be Seen as Piercing the Corporate Veil?
There are several factors that a court may look at to determine if the veil has been pierced, such as:
- Fraud or Misrepresentation: If a corporation was set up with the intention of defrauding creditors (think of shell corporations), it could be found to have pierced the veil. Alternatively, if the corporation has engaged in misrepresentation of any kind, then a court may decide to pierce the veil and hold shareholders or officers personally liable.
- Lack of Corporate Formalities: If a corporation has failed to follow proper corporate formalities. Such as their obligation to hold regular board meetings, keep accurate records, or fail to observe other corporate formalities, a court may decide to pierce the veil.
- Alter Ego: If a corporation is treated as the alter ego of its shareholders or officers, a court may decide to pierce the veil. This can occur if the shareholders or officers treat the corporation as an extension of themselves rather than as a separate legal entity. For instance, they fail to maintain separate financial affairs, use their business account to pay personal bills, or run their corporation out of their home.
- Inadequate Capitalization: If a corporation is knowingly undercapitalized, meaning it doesn’t have enough assets or funds to cover its liabilities, a court may decide to pierce the veil and hold shareholders or officers personally liable.
- Personal Guarantee: If a shareholder or officer has personally guaranteed a corporate debt, a court may decide to pierce the veil and hold the individual personally liable for the debt.
How the Process Works
The process is clear and straightforward. A lawsuit is filed against the shareholders or officers of the corporation. The plaintiff then has the burden of proof and must show adequate evidence of one of the above factors. If they meet the standard of proof, the court may rule in their favor and find the corporate shareholders personally liable.
In order to pierce the corporate veil, the plaintiff must show that the shareholders or officers engaged in some wrongdoing that justifies holding them personally liable. This may involve demonstrating that the corporation was set up with the intention of defrauding creditors, that the shareholders or officers failed to follow proper corporate formalities, or that the corporation was undercapitalized or comingled finances with their personal finances.
What Happens When the Corporate Veil is Pierced?
If a court deems the corporate veil has been pierced, shareholders and corporate officers may be held personally liable for the debts and obligations of the corporation. This means their personal assets may be seized or attached to satisfy company debt and obligation.
In some cases, piercing the corporate veil may also lead to reputational damage for shareholders and their corporations. This is because others will know that they engaged in unethical or illegal behavior and may be hesitant to conduct business with these individuals in the future.
Piercing the corporate veil is a serious legal remedy afforded by the courts that may have significant consequences for shareholders. It’s important to take every measure possible to avoid the look of impropriety by corporate officers. One way to accomplish this is by using a virtual office for your corporate address. Virtual offices, such as Opus Virtual Offices, are one tool that corporations can use to avoid the appearance of using their corporation as an alter ego. By having your corporate address attached to a virtual office rather than your home address, shareholders and officers should fall within the protection of the limited liability granted to corporate entities.
Virtual offices typically offer a variety of services, including reception service, parcel post receiving, meeting rooms, a corporate address, and more. Imagine all that and maintaining the corporate privilege of personal asset protection. If you’re considering a virtual office, consider Opus VO, one of the most competitively priced virtual offices within the U.S. Opus VO offers administrative support and virtual office services that will allow you to grow your business to new heights!
Posted on April 19, 2023 by Melanie Rauch