Many individuals decide to incorporate their business to protect themselves against liability. Unfortunately, this strategy can fail if the business owners fail do not pay attention to the corporate formalities, they may lose the protection of the corporate form. Lawyers refer to this as “piercing the corporate veil.” All business owners should take care to understand this concept.
The general rule
In most situations, the corporation or limited liability company is treated as an entity that is legally separate from the owners of the business. A liability claim arising from actions taken by the corporation or on its behalf cannot be made against the owners of the business. In some cases, however, this protection may not be sufficient to shield the owners from direct liability on a tort or contract claim. In New York, the corporate veil can be pierced, that is, a claimant can pursue the owners directly, under the following circumstances.
If the company is wholly owned by a single individual who did not treat the business as a separate entity, that individual may be held liable for the company’s debts if the owner used the corporation as a shield to hide or conceal a fraudulent or dishonest activity.
Proving that the defendant disregarded the corporate form
Corporations must hold regular meetings of their shareholders and boards of directors. The failure to hold such meetings or to keep proper minutes and records of those meetings can prove that the owner disregarded the corporate entity. A second method proof is showing that the corporation lacked adequate capitalization when it was formed or that it did not keep enough money on hand to pay its regular obligations. A third approach is proving that the owner used the corporation as a sham to conduct one or more fraudulent transactions.
Any business that wants to avail itself of the protection afforded by the corporate form may wish to contact an experienced business attorney for advice on the actions that may be used to prove that the corporation was a separate entity.