Piercing the Corporate Veil
Piercing the Corporate Veil
- To Pierce the Corporate Veil means to successfully hold
shareholders and/or officers (and receive payments from their personal assets)
personally liable for the debts and obligations (and jury awards) owed by the
corporation. The primary reason for incorporating was to avail the owners of the
corporation a shield against personal liability for the acts of the corporation. The
laws of all the states provide that if the shareholders, directors and officers
treat that corporation as an entity separate from each of them and they follow
corporate formalities, then they cannot be named as defendants in lawsuits
alleging negligent or wrongful acts by the Corporation.
Plaintiff's attorneys generally seek to pierce the corporate veil only when the corporation lacks deep pockets (i.e., the financial reserves and insurance to pay the judgment sought). The owners of private companies like to pay out as much of the corporate earnings as possible in the form of salaries, bonuses, benefits, and even lease payments to the owners. Consequently, private companies are prime targets for attempts to pierce the corporate veil.
For example, sometimes owners of a private corporation, when pressed for time, do foolish things like commingle corporate funds with personal funds in the bank accounts, use corporate funds to directly pay a shareholder's late mortgage payment, pay corporate debts directly out of personal funds (personal checking account, credit cards, etc.) without Board approval of the reimbursement of the expenses or of a loan of the funds to or from the corporation. They ceased treating the corporation as a separate entity from its shareholders, directors and officers and are open to having the corporate veil pierced.
During a lawsuit, plaintiff's attorneys will take corporate meeting minutes from you during the discovery phase of litigation to prove that the corporation is not truly a separate legal entity from its officers and shareholders. How?
Deficient corporate minutes can demonstrate that the officers and shareholders repeatedly acted without the authorization of a corporate resolution.
Like commingling corporate and personal money, actions without required corporate resolution evidence a disregard for corporate formalities that helps attorneys to 'pierce the corporate veil' (i.e., overcome the corporate shield against personal liability).
Maintaining accurate and timely corporate records is crucial. During an audit, the IRS, using minutes seized from your corporate minute book, will search for discrepancies between the corporate resolutions adopted by your shareholders and board of directors and the actions of your corporation.
Absent proper authorization in the corporate minutes (and accurate expense records), the IRS can reclassify expense reimbursement paid to you, a shareholder-employee, as a dividend. The payment of this "dividend" to you is not deductible by your corporation and is delinquent taxable income to you on which you may owe back taxes, interest and penalties.
Absent proper authorization in the corporate minutes (and written loan agreements), the IRS can reclassify insider loan funds from a shareholder to a corporation as additional capital contribution and the loan principal repaid to the shareholder as a dividend. The payment of this "dividend" to you is not deductible by your corporation and is delinquent taxable income to you on which you may owe back taxes, interest and penalties.
Absent proper and timely authorization in the corporate minutes, the IRS can reclassify "excessive" compensation paid to shareholder-officers as dividends. - The payment of this "excessive" compensation re-characterized by the IRS as a "dividend" to you is not deductible by your corporation (the non-excessive compensation remains deductible) and is delinquent taxable income to your shareholder-officers on which they may owe back taxes, interest and penalties.
If the corporate minutes demonstrate that the employees acted in good faith and in their corporate capacity, the plaintiff will have a very difficult time "piercing the corporate veil."
Disclaimer: The foregoing is intended to provide general information and may not be suitable in specific instances. The glossary information is not intended to be exhaustive, but rather to illustrate typical considerations. The material is provided with the understanding that it is not legal, accounting, tax or any other professional advice.
Copyright © 2003-2010 LawVantage.com, LLC. All rights reserved.
Important LawVantage.com, LLC and its website, CorporateBoardMinutes.com, do not render any legal, accounting or other consulting advice.
For legal advice, you should always consult with a qualified attorney-at-law.
Website development by
Vine Design.
Plaintiff's attorneys generally seek to pierce the corporate veil only when the corporation lacks deep pockets (i.e., the financial reserves and insurance to pay the judgment sought). The owners of private companies like to pay out as much of the corporate earnings as possible in the form of salaries, bonuses, benefits, and even lease payments to the owners. Consequently, private companies are prime targets for attempts to pierce the corporate veil.
For example, sometimes owners of a private corporation, when pressed for time, do foolish things like commingle corporate funds with personal funds in the bank accounts, use corporate funds to directly pay a shareholder's late mortgage payment, pay corporate debts directly out of personal funds (personal checking account, credit cards, etc.) without Board approval of the reimbursement of the expenses or of a loan of the funds to or from the corporation. They ceased treating the corporation as a separate entity from its shareholders, directors and officers and are open to having the corporate veil pierced.
During a lawsuit, plaintiff's attorneys will take corporate meeting minutes from you during the discovery phase of litigation to prove that the corporation is not truly a separate legal entity from its officers and shareholders. How?
Deficient corporate minutes can demonstrate that the officers and shareholders repeatedly acted without the authorization of a corporate resolution.
Like commingling corporate and personal money, actions without required corporate resolution evidence a disregard for corporate formalities that helps attorneys to 'pierce the corporate veil' (i.e., overcome the corporate shield against personal liability).
Maintaining accurate and timely corporate records is crucial. During an audit, the IRS, using minutes seized from your corporate minute book, will search for discrepancies between the corporate resolutions adopted by your shareholders and board of directors and the actions of your corporation.
Absent proper authorization in the corporate minutes (and accurate expense records), the IRS can reclassify expense reimbursement paid to you, a shareholder-employee, as a dividend. The payment of this "dividend" to you is not deductible by your corporation and is delinquent taxable income to you on which you may owe back taxes, interest and penalties.
Absent proper authorization in the corporate minutes (and written loan agreements), the IRS can reclassify insider loan funds from a shareholder to a corporation as additional capital contribution and the loan principal repaid to the shareholder as a dividend. The payment of this "dividend" to you is not deductible by your corporation and is delinquent taxable income to you on which you may owe back taxes, interest and penalties.
Absent proper and timely authorization in the corporate minutes, the IRS can reclassify "excessive" compensation paid to shareholder-officers as dividends. - The payment of this "excessive" compensation re-characterized by the IRS as a "dividend" to you is not deductible by your corporation (the non-excessive compensation remains deductible) and is delinquent taxable income to your shareholder-officers on which they may owe back taxes, interest and penalties.
If the corporate minutes demonstrate that the employees acted in good faith and in their corporate capacity, the plaintiff will have a very difficult time "piercing the corporate veil."
Disclaimer: The foregoing is intended to provide general information and may not be suitable in specific instances. The glossary information is not intended to be exhaustive, but rather to illustrate typical considerations. The material is provided with the understanding that it is not legal, accounting, tax or any other professional advice.
Copyright © 2003-2010 LawVantage.com, LLC. All rights reserved.
Important LawVantage.com, LLC and its website, CorporateBoardMinutes.com, do not render any legal, accounting or other consulting advice.
For legal advice, you should always consult with a qualified attorney-at-law.
Website development by
Vine Design.