Avoiding the Possibility of Losing the Liability Protections of the Corporate Form
When you choose a corporate as a business form, one of the most significant advantages is the protection that legal form provides for your personal estate. As a shareholder in a corporation, you can only be liable to the extent of your investment in the company—that’s typically what you paid to obtain the shares of stock in the enterprise. Unless you engage in certain wrongful actions, you can lose the value of your stock, but your personal assets can never be taken to satisfy a corporate debt or creditor.
Piercing the Corporate Veil
There are, however, limited situations where a creditor or litigant may seek to circumvent, or “pierce,” the corporate veil, asking the court to find that you are not just a shareholder, but are essentially the “alter ego” of the business. Here are the typical situations where a court may allow that:
- There has been some type of fraud, misrepresentation or wrongful act that has resulted in injustice to a third party—Often, this takes the form of “closing” one business and transferring all of its assets to a new business. If done to avoid payment of debts of the closed business, it may be grounds for piercing the corporate veil.
- Failure to maintain a distinctly different identity for the business and the shareholder—Commingling personal assets with business assets, using company property for personal needs, using company funds to pay for personal items—these activities all suggest that the company and the shareholder are one and the same, and can lead to a piercing of the corporate veil.
- Undercapitalizing the company—This is not about whether or not the company makes a profit…it’s about ensuring that the company has an adequate level of capital to meet its obligations. If not, the corporate form can simply operate as a shield from liability, and a court may allow the corporate veil to be pierced, particularly where the shareholder is significantly capitalized.
- Failing to act as a corporation—This may involve failure to properly file any documents required under state business laws, the failure to issue shares of stock, or any other activity that suggests that the business is not actually operation as a corporation
Contact MCIS Law
At MCIS Law, PLLC, in Stafford, we provide comprehensive counsel to businesses in southeast Texas. For a confidential consultation with an experienced and knowledgeable lawyer, email us or call our office at (346) 297-0121. We accept all major credit cards.