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THE CORPORATE VEIL
Protecting Your Personal AssetsThe creation of a corporation by the filing of its certificate of incorporation and the holding of an organizational meeting brings into existence a separate and independent legal entity. The main attribute of the separate legal existence of a corporation is the broad protection it offers from personal liability. This is referred to in the legal community as the corporate “veil” from liability.
Generally, the corporate veil will not be pierced, and a shareholder or sister corporation will not be held liable for the debts of the corporation, if the corporation (i) maintains corporate formalities, (ii) is not an alter ego for the dominant shareholder or sister corporation, and (iii) is not a sham to perpetrate a fraud.
Corporate Formalities
To maintain corporate formalities, a corporation must follow proper procedures in the formation of the corporation, in the appointment of directors, in the issuance of stock, in the holding of annual meetings, in the filing of annual reports with the state, in the maintenance of the corporation’s own property and in the maintenance of the corporation’s own financial books and accounts. This includes updating minutes and bylaws and holding board and shareholder meetings.
Alter Ego
A corporation will be considered an “alter ego” for the dominant shareholder(s) or a sister corporation when its corporate finances are commingled with those of the dominant shareholder(s) or sister corporation and where the corporation is being used as a façade for the dominant shareholder(s) or sister corporation’s business.
In Goldberg v. Lee Express Cab Co., the sole shareholder of Lee Express Cab Corporation was not entitled to dismissal of a personal injury action brought against him personally. The court found that the complaint set forth a cognizable cause of action for piercing the corporate veil because it alleged that the shareholder owned 16 other taxi corporations, that all 17 corporations were operated centrally and maintained as one entity, that the defendant individually operated all of the corporations and interchanged receipts, reimbursements, assets and properties, and that corporations were mere shams whose only purpose was to enable the sole shareholder to defraud the public.
In In re Island Seafood Company, Inc. v. Golub Corporation, the court held that while the owner of two corporations was the sole stockholder and officer of both corporations and seemed to disregard corporate formalities, that was insufficient to prove complete domination and control so as to allow the corporate veil to be pierced. The court relied on the fact that there was lack of evidence of the owner making personal use of corporate funds, the debtor being undercapitalized, the debtor using the sister corporation to transact its business, or any inter-corporate shuffling of assets designed to make the money judgment uncollectible.
Sham to Perpetrate a Fraud
To determine if the corporation is a sham to perpetrate a fraud, the courts look at “badges” of fraud. Badges of fraud are circumstances that so commonly accompany fraudulent transfers that their presence gives rise to an inference of fraud. In Dempster v. Overview Equities , the court stated that the general badges of fraud are:
- the close relationship among the parties to the transaction;
- the inadequacy of the consideration;
- the transferor’s knowledge of the creditor’s claims, or claims so likely to arise as to be certain, and the transferor’s inability to pay them; and
- the retention of control of property by the transferor after the conveyance.
In Rotella v. Darner, the court held that where an undercapitalized corporation is unable to pay a judgment debt and there has been disregard of corporate formalities and personal use of corporate funds, there is sufficient evidence of wrongdoing to justify piercing the corporate veil.
Conclusion
Therefore, to avoid the piercing of your company’s veil, observe corporate formalities, do not use the corporate form for your own purposes and capitalize your company accordingly; otherwise, your personal finances may be at risk.
- by Stephen T. Furnari
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