Business owners, here’s what it means to pierce the corporate veil
What does it mean to pierce the corporate veil?
The term refers to the veil of protection that keeps businesses operating as corporations, partnerships, or limited liability companies (LLC) separate from their owners and shareholders. These principles and statues are present
in every state to protect business owners of all sizes. To pierce the corporate veil means an owner can be held personally responsible for debt, misconduct, and other actions that occur within the business. In Florida, the corporate veil may only be pierced upon a showing of misconduct
What elements must be present to pierce the corporate veil in Florida?
There are three elements that must be proven to determine if a business has pierced the corporate veil:
The corporation serves as the alter ego of the business owner and the corporation’s independent existence was non-existent. For instance, the business owner uses the business to pay personal expenses like shopping and household expenses.
The business engaged in misconduct or an improper purpose such as defrauding clients.
The misconduct resulted in loss.
In what situations can a corporate veil be pierced?
A creditor may be able to pierce the corporate veil of a corporation when the corporation has no assets, no income, and it has no way to honor the obligations of a contract, but enters into the contract anyway.
Similarly, if a parent company does not conduct any operations, does not have any employees or payroll, and it does not have bank accounts, but it uses a subsidiary company in order to avoid paying a creditor, the parent company’s corporate veil may be pierced.
How can business owners protect themselves?
Here are some business practices that are important to keep in place to ensure that you maintain the “corporate fiction” so that the corporate veil cannot be pierced:
Keep the business accounting separate from any other accounting. Do not use business accounts to make personal purchases. Do not transfer funds between business and personal accounts without a valid business reason and proper documentation.
Be sure to sign all contracts as the owner or officer of the business using your corporate or company title. Your corporate or company title may be president, secretary, treasurer, director, member, manager, or a similar title depending on the type of business entity that you have. Never sign a contract as an individual person unless you are signing as a personal guarantor.
Confirm all business assets are owned by the company or corporation. For example, a landscaping company should have the documentation to show that the lawnmowers and other equipment are owned by the company.
Cynthia Simpson-Cannon, Palm Beach Business Attorney
Determining if a business entity’s corporate veil can be pierced in Florida is an extensive and difficult legal analysis that requires an experienced business attorney. Contact the Simpson-Cannon Law Firm today for more information.