Piercing the Corporate Veil… We Have All Heard About That but What Does It Mean To My Pocketbook?
As you know, a Texas corporation is a well-recognized entity for its complete liability shield to its shareholders. Unless a shareholder, director or officer (the “others”) is liable on some independent legal basis (i.e. personal tortfeasor or guarantor), such parties have no liability for corporate debts and obligations. Of course, the courts have allowed in extraordinary circumstances to “pierce the corporate veil” and thus subject the others to personal liability. Nonetheless, every business owner and shareholder needs to fully understand how this happens and how to avoid it.
How does a Plaintiff pierce the corporate veil?
A Plaintiff, during a lawsuit, can assert various theories to the fact finder that request the Courts not place liability solely on the corporation but on the others. Those theories are:
- Alter Ego Theory:
The Courts disregard the corporate entity when there exists such unity between the corporation and the individual that the corporation ceases to be separate and when holding only the corporation liable would promote injustice. The Texas Supreme Court has stated that the evidence may include the degree to which the corporate formalities have been followed and corporate and individual property have been kept separately, the amount of financial interest, ownership and control the individual maintains over the corporation and whether the corporation has been used for personal purposes.
- The Emergence of a “Sham to Perpetrate a Fraud”: Tort claimants and contract creditors need only show the breach of some legal or equitable duty which the law declares fraudulent because of its tendency to deceive others to violate confidence or to injure public interest.
- De-Emphasis of Corporate Formalities: You must have shareholder meetings per your Bylaws and prepare minutes, stuff the corporate book and represent your decisions as those made by the corporation.
- Single Business Enterprise: The assets of affiliates of a corporation may be reached to satisfy the liability of the corporation if the and the affiliated constitute a “single business enterprise”
- Reverse Corporate Veil Piercing: Sometimes a party will attempt to use the alter ego doctrine to characterize the assets of a corporation as the assets of its shareholder.
How do you prevent someone from piercing the corporate veil?
First, if you are a corporation, that entity has nothing to do with your personal business. By filing for a corporation, you have given birth to a new entity and it should be treated as such. Failure to recognize the corporate formalities and to commingle personal and corporate interests may result in personal liability.
The final advice is to have an attorney on your management team that can advise and discuss issues as needed. Piercing the corporate veil is difficult; however, it is possible and scary. The purpose of having a corporate entity is to preserve your personal assets.
