Protecting the Corporate Veil: Avoiding Personal Liability for Business Debts
Your business is booming, but have you considered whether your personal assets would be secure if your business was faced with a significant adverse legal fee? Bingham Greenebaum Doll LLP partner Margaret Christensen and attorney Joshua J. Burress address this question and outline eight factors for avoiding personal liability for business debts in their column for the Indiana PHCC newsletter.
Christensen and Burress explain that operating as a separate business entity rather than as a sole proprietorship is a good first step for the business form to protect you from bearing personal responsibility for the business' debts and liabilities. However, you must also protect the corporate form and ensure that a creditor could not claim – and a court would not find – that you misused the corporate form.
If a court was to find that a business owner controlled and manipulated the corporate form to the detriment of third parties, Christensen and Burress say it could "pierce the corporate veil" and hold the individual owner liable for the business' debts, giving a creditor (including an accident victim) the ability to seize personal assets in satisfaction of the debt.
In order to best protect your personal assets, Christensen and Burress warn business owners to be aware of the following eight factors that courts use to pierce the corporate veil:
- Undercapitalization of the corporation;
- The absence of corporate records;
- Fraudulent representations by corporation shareholders or directors;
- Use of the corporation to promote fraud, injustice, or illegal activities;
- Payment by the corporation of individual obligations;
- Commingling of assets and affairs;
- Failure to observe required corporate formalities; and
- Other shareholder acts or conduct ignoring, controlling, or manipulating the corporate form.
While courts have broad discretion in determining whether the corporate veil should be pierced, Christensen and Burress say one thing is certain: the more it appears that the business entity has been abused, the more likely it is that the corporate veil will be pierced.