How Strong is the Corporate Veil?

Is your corporate veil a fortress between the company and your personal assets? Or is it a transparent curtain barely protecting shareholders’ individual assets? Speak with a Monmouth County business lawyer to find out if your corporate veil can withstand an attack from potential plaintiffs.

If you operate your business as a corporation, you enjoy the benefit of shielding shareholders’ personal assets from the debts and liabilities of the company. Meaning, creditors can reach the corporation’s assets but once those are exhausted, the shareholder’s assets are safe. Or are they?

In some case, creditors will try to “pierce the corporate veil,” which means they will attempt to have the corporation set aside in order to reach the shareholders’ personal assets. This usually occurs when the corporation has insufficient assets, causing the plaintiff to claim that the corporation is a “sham” or “shell.” The motive generally behind a sham corporation is to perpetuate a fraud or advance the interests of its shareholders.
Getting Through the Corporate Veil of Protection

When is a company’s corporate veil vulnerable? Although it varies from state to state, the overall factors that courts examine are:

  • Did the company properly appoint directors and issue stock? Did it hold annual meetings and file annual reports with the state? Did it maintain proper financial books? Or were funds co-mingled with individual funds
  • Did the shareholders or owners use the corporation to advance personal interests?
  • How much financial control did the owners exercise over the corporation?

If the court examines the above and determines that the corporation and its shareholders are essentially the same entity, it will usually pierce the corporate veil. In addition, if the court finds that the corporation is a “sham” for the purposes of committing fraud upon third parties, it may also pierce the corporate veil.

For example, if shareholders knowingly formed a corporation to transact fraudulent real estate deals, and the shareholders took the profits from the corporation, victims of the fraud would have a valid argument for reaching the shareholders’ individual assets. The shareholders’ individual assets would help compensate the fraud victims.

While the corporate veil is a major benefit of corporate formation, properly maintaining the company and legitimate shareholder motives are key elements to keeping it in place. Contact an experienced Monmouth County business attorney to receive advice on keeping your personal assets protected from creditors and plaintiffs.