fbpx

When will Courts Pierce your Corporate Veil?

When will Courts Pierce your Corporate Veil and How to Avoid it

Pierce your Corporate Veil It takes a lot to get a judgment against you – you have to be proven liable for committing a civil wrong under the facts and law of your case. [1] If this has happened to your company, then things have gone very wrong. But could they get worse? Maybe.

“Piercing the corporate veil” is a phrase that comes from common law, that developed through court decisions over time. It describes an act by the court to subject the shareholders, not just the company itself, to liability. Many people incorporate because they generally understand that incorporating limits their liability, and do not realize that it may not always work. Even if you have incorporated, there are a number of instances when the court will allow a judgment creditor to pierce your corporate veil to reach your assets. [2]

  • Defective Incorporation

If your entity was not formed correctly when it originally was filed, the court may order the owners to personally pay the judgment. Improper formation could be because documents were not correctly submitted to the Secretary of State, information was missing, or another clerical error was made.

  • Failure to segregate resources

If you were paying personal bills from your company bank account, or your company paid for personal expenses, it may suggest that you and your company are one person. If you do not segregate resources properly, you may be accused of having a company that is an “alter ego” of you, and made to pay a judgment.

  • “Mere instrumentality”

If you are in control of the company and your direction caused the company to act in the manner that resulted in the judgment, then the company is your “mere instrumentality” – your puppet. If you directed the company to do something that resulted in harm, the court may direct you to pay.

  • Fraud or wrongful conduct

If your company did something fraudulent, like evade taxes or lie to its shareholders, or otherwise wrongful, like pollute a river, the individuals responsible might be subject to personally satisfying a judgment because the courts do not like permitting the corporate entity to protect wrong-doers.

There are ways that you can protect yourself from this terrible outcome. The obvious one is to provide excellent products and service to your customers. Sometimes, even when you do that, you can be sued. To protect small businesses, everyone should have a provision in their corporate documents that requires the company to indemnify its management and shareholders in the event of a suit or judgment. Another great way to protect yourself is to purchase an insurance policy to pay your legal bills and even judgments, if you should get sued. Finally, you might want to have a contract with your customers that limits your liability with them to a certain point, like perhaps a refund of the amount they paid for your product or service.

Other articles: