There are numerous benefits that come with choosing to conduct your business entity as a corporation, but one of the most prominent benefits is the protection against personal liability. Put another way, if a corporation racks up debts that it cannot pay – whether from unfulfilled contracts, liability in a personal injury lawsuit, or any other source – the corporation may end up becoming insolvent, but the shareholders will not be liable for the corporation’s debts.
Except when they are. Under a concept called “piercing the corporate veil,” a state or federal court can order the shareholders of a corporation incorporated in Florida to be personally liable for the debts of the corporation, which may lead to personal bankruptcy. Piercing the corporate veil is only employed by courts when certain conditions favor that outcome, and while you should always speak with a business attorney to assess your legal options when facing a litigation threat, here are some practices to avoid in order to prevent a piercing of the corporate veil.
CREATING A CORPORATION AS AN “ALTER EGO” FOR A SHAREHOLDER
The primary principle behind the protection of the corporate form is that multiple parties are coming together to form a venture, and control of that corporation is shared among those parties. What courts do not like to see is an individual (or a small number of individuals) who abuse the corporate form for the primary purpose of committing fraud and attempting to hide behind the corporate protections of no shareholder liability.
One aspect of this is domination of the corporation by a single shareholder who essentially has the ability to make all corporate decisions at the expense of all other shareholders. While this is not per se problematic, a court may pierce the corporate veil if it views the activity as fraudulent in nature.
OVERLOADING THE CORPORATION WITH DEBT
Certainly, many corporations need to take on a large amount of debt to finance their operations, but when a court believes that shareholders thinly capitalized the corporation and overloaded it with debt in order to mislead creditors, it may allow for the piercing of the corporate veil.
SHAREHOLDERS USING CORPORATE ASSETS FOR THEMSELVES
If a shareholder treats the corporation as his or her own personal piggy bank – for example, using corporate assets for personal expenses, embezzling funds, or commingling personal and corporate assets – a court may choose to pierce the corporate veil, especially where these actions come at the expense of paying creditors.
USING SUBSIDIARY CORPORATIONS IN FRAUDULENT WAYS
While there are numerous appropriate and legal strategies for creating and using subsidiary corporations as a way to manage and isolate risk, a court may pierce the corporate veil if it determines that the subsidiary corporation has little to no independent existence from the parent and is being used to defraud other parties.
CONTACT FLORIDA BUSINESS AND CORPORATE ATTORNEY RYAN MYNARD TODAY
If you have any questions about personal and/or corporate liability in Florida, or you are seeking counsel in any other Florida business matter, contact Florida business attorney Ryan Mynard at +1-850-683-3940 today to get started.