Piercing the Corporate Veil

A limited liability company is generally secured by the principle that a shareholder is not personally liable for the actions or debts of the company. However, a limited liability business’ protection of its owners’ and shareholders’ personal assets is not absolute. There are several instances in which a court could hold a corporation’s owners liable for debts or misconduct. This process is called “piercing the corporate veil,” and may be applied to any business that provides limited liability to its owner or owners. This blog post will explore how this may be done, and what you can do to ensure that your LLC is compliant with the law.

Limited liability companies exist as entities separate from their owners. In addition to filing business formation documents with the Secretary of State such as Articles of Incorporation, LLCs must also have an operating agreement, separate bank account, maintained business records, etc. When a business fails to operate in accordance with the legal requirements of an LLC, a court can pierce the veil and take away a business’s liability protection. Piercing the corporate veil permits a creditor of the company to reach the assets of the individual business owners.

While courts are generally hesitant to pierce the corporate veil, Indiana courts have laid out several factors they will consider when deciding whether to pierce the corporate veil. These include:

• Whether the entity was undercapitalized,
• Whether there is an absence of corporate records,
• Whether there was fraudulent representation by corporate shareholders or directors,
• Whether the owners promoted fraud, injustice or illegal activities,
• Whether the owners use the corporation to make payments on individual obligations,
• Whether the owners comingled personal assets with those of the business,
• Whether the owners failed to observe required corporate formalities, and
• Whether there were any other shareholder acts or conduct ignoring, controlling or manipulating the corporate form.

Knowing what factors courts will consider, here are some tips for your business to prevent the piercing of the corporate veil:

•  The business should have sufficient capital and other resources to support its operation and pay its debts.
• All business should be conducted in the business’s name, not any individual’s name.
• All business records should be kept current and board meetings should be held regularly.
• All bank accounts should be in the business’s name and the business’s name should appear on any checks or other banking transactions.
• All contracts should be in the business’s name and be signed by an authorized representative of the business.

Business owners and shareholders may suffer serious financial consequences if their business’s corporate veil is pierced. An attorney can help you make sure you are doing all you can to protect your business’s limited liability status.

Do you have more questions about piercing the corporate veil and how to protect yourself from it? McNeelyLaw has Indiana business law attorneys who are available to consult with you to make sure you are following all of the necessary steps to maintain your business’s limited liability status. Contact us at 317-825-5110 to speak with an attorney today.

This McNeelyLaw LLP publication should not be construed as legal advice or legal opinion of any specific facts or circumstances. The contents are intended for general informational purposes only, and you are urged to consult your own lawyer on any specific legal questions you may have concerning your situation.