As Cialis FAQ corporate "shareholder", limited liability company (LLC) "member" or limited partnership (LP) "limited partner", your liability for company debts and obligations is generally limited used car donation the amount you paid for your ownership interest in the company. That is generally because when your company articles were filed with the state, the state breathed life into it as an "artificial" entity - a corporate "fiction". As a separate legal "person" the state granted your company its personality; the privilege to do business in its own name; the privilege to buy and sell property; the privilege to sue and be sued; and, among other things, the privilege of limited liability for the company owners.
But...after the company is formed your actions as an owner, director or officer can jeopardize the company's separate legal and tax status, and your Garbage Pail Kids limited liability.
Your small business entity is entitled to all the same benefits, tax deductions, write-offs, privileges and perquisites as the large companies and firms.
It is also bound by all the same rules of corporate governance as the large companies and firms. Courts - and the IRS - are crystal clear on this subject: If you neglect to treat your company as a separate legal entity, they will too. They will set it aside and impute personal liability to you, and disallow tax deductions. To do just that, they use rulings that contain terms like "alter ego", "nominee", "self dealing", "arm's length", "commingling", and "failure to observe corporate formalities".
Litigators know this. They also assume that you neglect the details of good corporate governance, like holding meetings, adopting resolutions and recording these events in corporate minutes. They know that most people are ignorant, intimidated, or just too busy to tend to the formalities. It is the easiest thing for them to prove, so that's exactly what they focus on when they launch their attack on you and your company.
Your personal battle starts with a lawsuit, judgment, lien, seizure, bankruptcy, divorce, or, God forbid...a revenuer's Notice of Examination. Among the first salvos launched by counsel for the plaintiff, or the Revenue Agent: A subpoena duces tecum, or summons, for copies of your formal corporate minutes and records. That's the way it works. You'd better have them in good order. Or else...YOU LOSE.
What stands between you and your corporation is its veil. That armor shield keeps corporate creditors, litigants, revenuers and other would-be adversaries from merging you with your company. If they can do that, they can steal your personal assets to satisfy their claims against the company - valid or not.
Lack of Corporate Formalities
A typical case where a court could pierce the corporate veil may involve related corporations. Various financial transactions may have been conducted between the companies. The companies may have neglected to properly observe certain corporate formalities pertaining to these inter-company transactions, such as documenting in minutes or resolutions the purpose and intent of the transactions. Later, a creditor of one or all of the companies may be unable to collect a debt from the corporations so the creditor launches a lawsuit. In the lawsuit, the plaintiff alleges a fraud where the defendant companies and their owners tried to maneuver corporate funds and assets to hide them from the creditor. The evidence shows the company owners had transferred money between the corporations, used corporate monies for personal expenses, and disposed of corporate assets for less than fair market consideration.
Without corporate minutes, resolutions and other supporting documentation to the contrary, a court would likely rule it appropriate to pierce their corporate veil. The result would be to hold the owners of the corporations personally liable for the corporate debts, obligations and expenses.
Typically, a court's decision in such cases will point out examples where the corporations and their owners readily commingled funds, failed to maintain adequate corporate records, disregarded corporate legal formalities, and failed to maintain an arm's-length relationship. Further, the corporations disposed of their assets without fair or adequate consideration. The court would thus conclude that there was substantial evidence to support a finding that adherence to the corporate fiction would sanction a fraud and lead to the evasion of a legal obligation.
There's Those Terms Again
Notice how these terms keep popping up in reference to corporate veil piercing:
"...readily commingled funds..."
"...failed to maintain adequate corporate records..."
"...disregarded corporate legal formalities..."
"...failed to maintain an arm's-length relationship..."
If corporations and their owners have a good reason for moving funds among their companies and themselves, they should record it in the corporate minutes. A simple resolution showing their business purpose and intention for the transactions would generally suffice. Without that kind of evidence, though, a court will rule on the facts as they construe them, particularly if there is no substantial argument to the contrary.
Take a lesson from such a case. Keep good corporate records and run your company as a separate legal entity. Or else...YOU LOSE.
Joseph Young is a small business consultant and paralegal with 25 years experience. He has worked with hundreds of clients to form, operate and maintain corporations, limited liability companies (LLCs), limited partnerships (LPs), trusts and other hybrid entities. His focus is on establishing, enhancing and reinforcing your corporate veil. His mission is to help you protect your personal limited liability and tax benefits. His approach is to simplify the observance of required corporate formalities, which includes adopting resolutions and recording minutes of corporate proceedings. You can find out more at href="incorporation911.com">Incorporation911.com
