Piercing the Corporate Veil
One of the reasons corporations are a popular type of business organization is the ability to reduce personal liability, as courts generally recognize the corporation as a separate legal entity from its shareholders. When a corporation incurs debts in excess of the corporation’s assets, creditors’ claims are typically satisfied with corporate assets only, no matter how limited they may be. However, in some instances, shareholders may be attempting to hide behind what is known as the “corporate shield.” In those particular cases, a court may ignore the corporation’s existence and hold shareholders personally liable for any corporate debts. This is what is known as “piercing the corporate veil.”
In general, it takes pretty egregious acts for a court to waive the corporate shield. Often these acts are committed by closely held corporations, especially ones that are attempting to use the corporate entity as a front for their personal endeavors.
Some of the characteristics that tend to be involved in cases where piercing the corporate veil include:
- Insufficient business capital for what the nature and risks are of said business
- Non-compliance with corporate formality requirements, like issuing stocks and holding required meetings
- Mixing corporate assets with personal business of shareholders
- Fragmenting the business into separate corporations excessively
- Creating a corporation with the sole purpose to avoid existing obligations
- Dominant shareholder siphoning off corporate assets
Alter Ego Theory
A term often used in conjunction with piercing the corporate veil is the alter ego theory. This is where the plaintiff’s attorney attempts to extend the reach of liability to additional parties by claiming they were “alter egos” of the primary defendant. These additional entities may be subsidiaries or affiliates of the corporation. By bringing in additional defendants, it can greatly expand shareholders’ personal liability beyond the available corporate assets.
To establish an alter ego claim, generally two elements have to be established. One is proof of a unity or ownership that shows the corporation and shareholder exists, and the other is that there will be inequitable results if these acts are treated as those belonging to the corporation only.
Commingling funds, or mixing corporate and personal assets, is one of the most common reasons creditors can pierce the corporate veil. It’s a breach of fiduciary duty and it is a big violation in keeping the corporation a separate legal entity. An example would be when you deposit corporate funds into your personal bank account. Or, when you make withdrawals from your business account to pay personal debts without proper documentation. Other examples would be using the same bank account for both personal and business needs, and moving money back and forth between business and personal accounts without any documentation.
Hiring a Washington DC Business Lawyer
The experienced business law team at Tobin O’Connor & Ewing is available to help you with all your Washington D.C. business organization needs. Our specialized team can ensure you learn how to protect your corporation or LLC and reduce your risk from piercing the corporate veil. Contact us at 202-362-5900 and make an appointment to meet with one of our attorneys today.