• A Corporate Entity: A Means to Limiting Liability, But Not Just a Shield
  • July 12, 2012 | Author: Sean M. Golden
  • Law Firm: Vandeventer Black LLP - Richmond Office
  • It is an all-too-commonly held belief that, by merely registering an organization as a corporation or limited liability company with the State Corporation Commission, or by signing a corporation’s name to a contract, those individuals can totally shield themselves from liabilities associated with that corporation or LLC.  This isn’t necessarily the case, however.

    It is true that a corporation is a legal entity that is separate and distinct from its stockholders, members, or owners.  And, it is also true that when a corporation ‘causes injury,’ it is the corporation that is directly liable, not the owners or shareholders.  That being said, when the stockholders, members, or owners of a corporation or LLC fail to follow the necessary corporate formalities, or when it becomes apparent that the corporation is being used essentially as a legal ‘stooge’ merely for the purpose of avoiding personal liabilities, a court may disregard the corporate entity and find the corporation’s individual shareholders personally liable.  This phenomenon is called “piercing the corporate veil.”  

    Below are a few traits or factors that courts will consider when piercing the veil of a corporation and finding individual owners liable:

    • Undercapitalization - courts may be suspect of the legitimacy of a corporation if, from its inception, it has been unable to pay its costs of doing business because it has not been sufficiently capitalized.

    • Not respecting the corporate identity - when the owner(s) of a corporation blur the lines between the corporation’s identity and that of themselves, courts become suspicious.  Courts will consider piercing the corporate veil when a corporation is merely a “stooge,” “dummy,” or “alter-ego” of the owner(s).  Individuals should take care to make sure that when they are acting on behalf of their corporation, they take care to represent that accurately.

    • Failing to observe corporate formalities - conducting corporate meetings and taking meeting minutes, maintaining the required corporate records and registrations, and properly accounting for the corporation’s finances and not intermingling them with those of the owners or other corporations are all examples of corporate formalities that a court will look for in determining whether to pierce the corporate veil.  Failing to follow these formalities may lead to disregarding the corporate identity.

    • Committing an injustice - the Supreme Court of Virginia has made clear that it will consider piercing the corporate veil when the shareholder or owner has controlled or used the corporation “to evade a personal obligation, to perpetrate fraud or a crime, to commit an injustice, or to gain an unfair advantage.”

    Note that when courts pierce the corporate veil, it is usually for small, closely held corporations.  The lessen for owners of closely-held corporations or members of LLC’s is to pay attention to the details in managing the company, to jump through the necessary hoops, and to follow the formalities in order to ensure that you’re maintaining your legal protection.