Your Personal Assets
back to published articles
The 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.
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.
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.
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.
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;
- the retention
of control of property by the transferor after the conveyance.
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.
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
Law | Broker-Dealers | Investment
Advisers | Attorneys | Disclaimer
Resources | Pledge
| Speaker Services | Client
Comments | Contact
11 Broadway | Suite
615 | New York, NY 10004 | +1 212 480 8800
2006 Furnari Scher LLP. All Rights Reserved. Use of this website is
subject to disclaimer.