What Piercing the Corporate Veil Means for Your Personal Liability

What is piercing the corporate veil? If you’re navigating an issue with your company’s debts or legal obligations, a business lawyer in Phoenix, AZ, can improve your understanding of this essential principle.

Anthony Law Group is a team of experienced attorneys who can help you navigate these existing obligations. Our team can advocate for you in the courts and help protect shareholders from fraud and other adverse circumstances.

What Is Piercing the Corporate Veil?

The corporate veil refers to a corporate structure that protects investors and owners from personal liability for corporation assets and debts. In other words, it states that if a limited liability company, or other corporate entity goes bankrupt or has financial trouble, it doesn’t hold members, owners or shareholders individually liable. It accomplishes this by maintaining the business as a separate legal entity.

Veil piercing refers to removing this protection, which often occurs in the following situations:

Fraud Can Convince Courts To Void the Veil

When the courts suspect a business entity of actual fraud where the owners or shareholders participated in the fraud, they may seek to hold the owners or shareholders personally liable. Owners shape the decisions and conduct of the company and thus can potentially use the structure of a corporation to hide criminal conduct.

The concealment principle is an important aspect of veil piercing. In certain circumstances, looking beyond the corporate form does not qualify as violating the veil. Courts have ruled that it simply involves discovering the truth behind how the company operates.

The evasion principle is another crucial precedent. It holds that when a group of people use a company to commit actual fraud, the courts can set aside its status as a separate entity.

Inadequate Capitalization Indicates a Lack of Independence

What is piercing the corporate veil? Courts may allow the practice when a company does not have enough funds to cover its current liabilities.

This can lead to corporate veil piercing because it often indicates that owners or shareholders are comingling their personal assets and using the company as an alter ego rather than keeping the business separate. If the investors of the corporation assume some liability, creditors have a better chance of receiving pay, even if bankruptcy occurs.

Ignoring Corporate Formalities Casts Doubt on Separation

When a business fails to observe corporate formalities, it leaves it vulnerable to shareholder liability. These formalities are a set of proper procedures that include the following:

• Maintaining distinct financial accounts and avoiding comingling assets
• Adopting bylaws for the corporation
• Holding annual meetings for shareholders and the board of directors
• Complying with state and local regulations

When a company forgoes these duties, the alter ego theory suggests that there is a high likelihood that the corporation only exists as an extension of the shareholders or owners. As a general rule, the doctrine states that the courts can intervene to exert control and hold any party liable, like managers or board members, responsible for paying the corporation’s debts.

How Can a Corporate Law Attorney Help With Veil Piercing?

Now that you know the answer to “What is piercing the corporate veil,” consider how an experienced attorney can help you navigate corporate fraud. Evaluate the following benefits of working with one:

A Corporation’s Lawyer Can Help Maintain Formalities

A corporation benefits when it can avoid fraud and other issues that allow veil piercing. Consider asking the attorney for the following services:

• Drafting articles of incorporation and ensuring proper structure
• Staying compliant with state and federal law
• Keeping personal and corporation finances distinct
• Writing and reviewing contracts with another person or company

They Play a Crucial Role in Defending a Person in Court

When a plaintiff sues a corporation, an attorney can defend the company as a whole or individual clients. The process starts by gathering evidence that demonstrates the directors, management, or corporation acted as they should. They may try to cast doubt on the plaintiff’s credibility.

If you hire them for personal defense, they may show you gained no direct personal benefit from the corporation’s practices. Even if the judge holds other shareholders liable, an attorney may successfully shield you from sharing in that liability if they can prove you did not violate any law or suggested practices.

These cases require the same burden of evidence as other allegations. If the attorney can create reasonable doubt, either on a corporate or personal level, these factors can reduce or eliminate liability.

What Steps Should You Follow To Find a Competent Lawyer?

Once you are done searching, “What is piercing the corporate veil,” you may feel motivated to find a lawyer. Follow these steps to find one that can help you avoid an adverse ruling.

1. Read Reviews and Ask for Referrals

Read reviews from third-party websites rather than on the attorney’s site alone. Identify positive and negative trends to gain an accurate perception of how they serve their clients.

You should also ask for references from other people who have navigated similar situations. If another corporation had a positive experience, you may, too.

2. Confirm They Have Applicable Experience

Avoid working with a lawyer who does not have particular experience with corporate law. You need an attorney familiar with all the nuances of local, state, and federal guidelines and previous rulings that could affect your ruling. This usually requires significant experience in advocating for businesses.

3. Ask About Similar Cases and History of Success

When you find a lawyer you like, ask them about similar cases they have handled. They should have a strong reputation for success in both settling cases and advocating in front of a judge or jury. Ask them whether you have a reasonable chance of success.

Schedule a Consultation With a Business Lawyer Today

What is piercing the corporate veil? At Anthony Law Group, we can answer these questions and more. Whether you are dealing with a business partner committing fraud or want to ensure your new corporation is beyond reproach, count on our experience and knowledge.

Call (602) 362-2396 to start the process with a free consultation.