Piercing the Corporate Veil

Last week, I listened to a presentation by Jim Hinds and Paul Shankman from the Law Offices of James Andrew Hinds, Jr. on whether or not an individual is personally liable for the acts of their corporation.

This issue is of significant concern to a lender when it provides a business loan. The lender needs to determine whether or not the corporation is a legal entity separate and distinct from its stockholder when evaluating the likelihood of repayment of the business loan. This may very well determine whether or not the lender requires a personal guarantee of the business loan obligation from the shareholder.

However, even if you did not provide a personal guarantee of the business loan obligation, you could be held responsible for its repayment by a court if you don't correctly conduct your business affairs.

Why?

Under the alter ego doctrine, if a corporation is used to perpetuate a fraud or accomplish some other wrongful purpose, a court may disregard the corporate entity and hold the individual who controls the corporation liable for the corporation's acts. This is known as "piercing the corporate veil".

Hinds and Shankman pointed out there are some important steps one can take to prevent a court (or lender) from holding a business owner personally responsible for the acts of their corporation.

• Keep corporate formalities - have corporate meetings, maintain minutes, pay business taxes or fees as appropriate.
• Don't commingle assets and keep separate corporate records and financial statements.
• Document shareholder loans properly and in a timely manner.
• Don't personally guarantee a corporation's debts.

This last one is pretty hard to avoid for almost all small businesses and many medium sized businesses.

There is no absolute protection from an alter ego claim. Following these and other steps recommended by Hinds and Shankman will greatly reduce the likelihood that a business owner will be held liable for the acts of their corporation or LLC.

Jim Hinds and Paul Shankman can be reached at 310-316-0500 if you would like to request a copy of their presentation or to ask them any questions.

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Tags : piercing the corporate veil , business loans