| As a corporate "shareholder", limited liability company | | | | corporate veil may involve related corporations. |
| (LLC) "member" or limited partnership (LP) "limited | | | | Various financial transactions may have been |
| partner", your liability for company debts and obligations | | | | conducted between the companies. The companies |
| is generally limited to the amount you paid for your | | | | may have neglected to properly observe certain |
| ownership interest in the company. That is generally | | | | corporate formalities pertaining to these inter-company |
| because when your company articles were filed with | | | | transactions, such as documenting in minutes or |
| the state, the state breathed life into it as an "artificial" | | | | resolutions the purpose and intent of the transactions. |
| entity - a corporate "fiction". As a separate legal | | | | Later, a creditor of one or all of the companies may |
| "person" the state granted your company its | | | | be unable to collect a debt from the corporations so |
| personality; the privilege to do business in its own | | | | the creditor launches a lawsuit. In the lawsuit, the |
| name; the privilege to buy and sell property; the | | | | plaintiff alleges a fraud where the defendant |
| privilege to sue and be sued; and, among other things, | | | | companies and their owners tried to maneuver |
| the privilege of limited liability for the company owners. | | | | corporate funds and assets to hide them from the |
| But...after the company is formed your actions as an | | | | creditor. The evidence shows the company owners |
| owner, director or officer can jeopardize the | | | | had transferred money between the corporations, |
| company's separate legal and tax status, and your | | | | used corporate monies for personal expenses, and |
| personal limited liability. | | | | disposed of corporate assets for less than fair market |
| Your small business entity is entitled to all the same | | | | consideration. |
| benefits, tax deductions, write-offs, privileges and | | | | Without corporate minutes, resolutions and other |
| perquisites as the large companies and firms. | | | | supporting documentation to the contrary, a court |
| It is also bound by all the same rules of corporate | | | | would likely rule it appropriate to pierce their corporate |
| governance as the large companies and firms. Courts | | | | veil. The result would be to hold the owners of the |
| - and the IRS - are crystal clear on this subject: If you | | | | corporations personally liable for the corporate debts, |
| neglect to treat your company as a separate legal | | | | obligations and expenses. |
| entity, they will too. They will set it aside and impute | | | | Typically, a court's decision in such cases will point out |
| personal liability to you, and disallow tax deductions. To | | | | examples where the corporations and their owners |
| do just that, they use rulings that contain terms like | | | | readily commingled funds, failed to maintain adequate |
| "alter ego", "nominee", "self dealing", "arm's length", | | | | corporate records, disregarded corporate legal |
| "commingling", and "failure to observe corporate | | | | formalities, and failed to maintain an arm's-length |
| formalities". | | | | relationship. Further, the corporations disposed of their |
| Litigators know this. They also assume that you | | | | assets without fair or adequate consideration. The |
| neglect the details of good corporate governance, like | | | | court would thus conclude that there was substantial |
| holding meetings, adopting resolutions and recording | | | | evidence to support a finding that adherence to the |
| these events in corporate minutes. They know that | | | | corporate fiction would sanction a fraud and lead to |
| most people are ignorant, intimidated, or just too busy | | | | the evasion of a legal obligation. |
| to tend to the formalities. It is the easiest thing for them | | | | There's Those Terms Again |
| to prove, so that's exactly what they focus on when | | | | Notice how these terms keep popping up in reference |
| they launch their attack on you and your company. | | | | to corporate veil piercing: |
| Your personal battle starts with a lawsuit, judgment, | | | | "...readily commingled funds..." |
| lien, seizure, bankruptcy, divorce, or, God forbid...a | | | | "...failed to maintain adequate corporate records..." |
| revenuer's Notice of Examination. Among the first | | | | "...disregarded corporate legal formalities..." |
| salvos launched by counsel for the plaintiff, or the | | | | "...failed to maintain an arm's-length relationship..." |
| Revenue Agent: A subpoena duces tecum, or | | | | If corporations and their owners have a good reason |
| summons, for copies of your formal corporate minutes | | | | for moving funds among their companies and |
| and records. That's the way it works. You'd better | | | | themselves, they should record it in the corporate |
| have them in good order. Or else...YOU LOSE. | | | | minutes. A simple resolution showing their business |
| What stands between you and your corporation is its | | | | purpose and intention for the transactions would |
| veil. That armor shield keeps corporate creditors, | | | | generally suffice. Without that kind of evidence, though, |
| litigants, revenuers and other would-be adversaries | | | | a court will rule on the facts as they construe them, |
| from merging you with your company. If they can do | | | | particularly if there is no substantial argument to the |
| that, they can steal your personal assets to satisfy | | | | contrary. |
| their claims against the company - valid or not. | | | | Take a lesson from such a case. Keep good |
| Lack of Corporate Formalities | | | | corporate records and run your company as a |
| A typical case where a court could pierce the | | | | separate legal entity. Or else...YOU LOSE. |