What is the Corporate Veil?
Conducting business as a corporation or limited liability company (LLC) generally protects the business owner’s personal assets from liability claims against the company. This liability protection is afforded because corporations and LLC’s are viewed as separate entities, distinct from their owners, thus creating a “corporate veil” between the business and the owners. Unfortunately, owners often abuse the limited liability protection to defraud creditors and protect themselves from those same creditors.
What Does Piercing the Veil Mean?
Florida law allows for that veil to be “pierced” in certain circumstances, allowing for creditors to go after the owner’s individual assets. Piercing the veil means the court disregards the limited liability protection and the person suing the company can go after the owners personally. If the creditor can show that the owners of the business engaged in misconduct that caused the company to be unable to pay its creditors, then courts will pierce the corporate veil.
How to Plead Piercing the Corporate Veil
Piercing the corporate veil is not a cause of action, it is an equitable doctrine which allows a creditor to pierce the veil if the corporation is found liable and is unable to pay its judgment.
In Florida, “piercing the corporate veil” is governed by the Florida Supreme Court case Dania Jai-Alai Palace, Inc. v. Sykes, 450 So. 2d 1114 (Fla. 1984). The court held “the corporate veil may not be pierced absent a showing of improper conduct.” This language is very vague and has resulted in subsequent litigation giving meaning to the rule. Specifically, subsequent litigation has developed the elements required to pierce the corporate veil. A plaintiff must prove (1) there is a lack of separateness between the corporation and its owners; (2) improper conduct in the use of the company by the owners; and (3) the improper conduct was the proximate cause of the alleged loss.
Alter Ego Element in Florida
The first element requires a showing that the company is an alter ego of the owners. The Plaintiff must show that the owners controlled the company to the extent that the company and owners were alter egos of one another. In other words, piercing of the veil is imposed when the personal affairs of the owners and the business affairs of the company become confused. Another version of the alter-ego theory is the ‘mere instrumentality’ theory, which is used to pierce the veil when a parent corporation wholly owns a subsidiary company which it controls to an extent that the subsidiary is a mere instrumentality of the parent. In that context, the owner is the parent corporation, so piercing the veil will allow a creditor of the subsidiary to go after the assets of the parent.
Factors Courts Consider
Florida courts will not pierce the corporate veil simply because there is no separateness between a company and its owners. A plaintiff must show proof of improper conduct. Here are some circumstances where courts have held owner’s conduct to be improper constituting a basis for piercing the corporate veil:
- The owners are commingling personal and business funds and other assets, failing to segregate funds of separate entities.
- The owners treat the corporation’s assets as his or her own.
- The owners issue stocks without obtaining authority to do so.
- The owners fail to maintain adequate corporate records including meeting minutes or fail to maintain separation between the records of separate entities.
- The owners form a new corporation with the purpose of transferring the existing liability of another entity.
- The use of the same business location or office and the employment of the same employees or attorneys in separate entities.
- The failure to adequately capitalize a corporation or the total absence of corporate assets.
- The use of a corporation as an instrumentality for a single venture or the business of an individual or another corporation.
- The failure to maintain an arm’s length relationship among the related parties and the disregard of legal formalities.
- The concealment and misrepresentation of the identity of the responsible ownership, management, and financial interest, or concealment of personal business activities.
- Contracting with the intent to avoid performance by use of a corporate entity as a shield against personal liability, or the use of a corporation as a subterfuge of illegal transactions.
This list is not exhaustive, and many of these conducts will not constitute basis for piercing the corporate veil on their own. For example, courts have held that the failure to maintain corporate formalities alone is not sufficient to pierce the veil without further proof of intent or other misconduct.
How Do You Avoid Piercing the Corporate Veil?
The limited liability protection afforded to owners can be taken away from any company. Here are some basic rules to follow to avoid having the corporate veil pierced: maintain all of your corporate records from operating agreements and bylaws to annual minutes, maintain separate bank accounts for your business and your personal funds, maintain an adequate amount of capital in the business, perform all annual filings, file separate tax returns, and simply practice business in good faith.