Piercing the Corporate Veil Are your personal assets at risk?
Clients incorporate, in part at least, to protect their personal assets in the event their business is sued. However, attorneys who are successful in “piercing the corporate veil” of protection may be able to go after your personal assets. That’s why its important to “play the game” by the rules. It’s simply not enough to incorporate your business and forget about the details until faced with a lawsuit. By then it may be too late!
In the United States, corporate veil piercing is the most litigated issue in corporate law. Factors for Courts to Consider
- Significant undercapitalization of the business entity (capitalization requirements vary based on industry, location, and specific company circumstances)
- Failure to observe corporate formalities in terms of behavior and documentation
- Intermingling of assets of the corporation and of the shareholder
- Treatment by an individual of the assets of corporation as his/her own
- Failure to pay dividends
- Siphoning of corporate funds by the dominant shareholder(s)
- Non-functioning corporate officers and/or directors
- Concealment or misrepresentation of members
- Absence or inaccuracy of corporate records
- Was the corporation being used as a “façade” for dominant shareholder(s) personal dealings; Alter Ego Theory
- Failure to maintain arm’s length relationships with related entities
- Manipulation of assets or liabilities to concentrate the assets or liabilities
- Other factors the court finds relevant
It is important to note that not all of these factors need to be met in order for the court to pierce the corporate veil. Further, some courts might find that one factor is so compelling in a particular case that it will find the shareholders personally liable.
Piercing the Corporate Veil can happen when:
- corporate debt is knowingly incurred when the company is already insolvent;
- required annual shareholders or board of directors meetings are not held, or other Corporate-Formalities are not observed;
- corporate records, especially minutes of directors meetings, are not properly or adequately maintained;
- shareholders remove unreasonable amounts of funds from the corporation, endangering its financial stability;
- there is a pattern of consistent non-payment of dividends, or payment of excessive dividends;
- there is a general commingling of corporate activity and/or funds with those of the person or persons who control the corporation;
- there is a failure to maintain separate offices, the company has little or no other business and is only a facade for the activities of the dominant shareholder who is in fact, the corporate “alter ego.” [Piercing the Corporate Veil]
“The corporation is required to keep correct and complete books and records of account and must keep minutes of the proceedings of its shareholders, board of directors and executive committee, if any. The corporation must also keep a record containing the names and addresses of all shareholders, the number and class of shares held by each and the dates when they respectively became the owners of record thereof. (See Section 624 of The Business Corporation Law) In addition, a meeting of shareholders must be held annually for the election of directors and the transaction of other business on a date fixed by or under the by-laws. (See Section 602 of the Business Corporation Law)” [ NYS Department of State]
Having proper accounting records is the first step in building your wall of protection. Call us if you would like to discuss this or any other related matter.
VB&T Certified Public Accountants, PLLC
December 22, 2014
Areas of Service: CPA New York City, CPA Manhattan, CPA 10019, CPA Uptown NYC, CPA NYC, CPA Central Park, CPA 7th Ave NYC
VB&T Certified Public Accountants, PLLC