That's a Nice Boat, Keep It: Protecting and Piercing the Corporate Veil

January 19, 2015 | Charles Bowen

meteor-like-sun_GygIYyw_

As a business owner in Georgia, you already know there is always the possibility of being sued with or without just cause.  If you have not already done so, we strongly recommend that you protect yourself and your business by incorporating as a C-Corp, S-Corp or LLC. More information on this process can be found in a previous blog post.

While incorporation is critical in limiting your exposure to personal liability, it is not infallible. There are situations in which the corporate veil can be pierced (See “Piercing the Corporate Veil”), holding owners liable for their company’s actions. In these cases, personal assets can be seized to satisfy business debts and liabilities. That’s the bad news. The good news? Nearly all of these situations can be avoided by following some basic and common sense protocols.

WHEN CAN A LITIGANT PIERCE THE CORPORATE VEIL UNDER GEORGIA LAW?

While there are several circumstances in which the liability shield can be pierced or disregarded, most originate from two primary drivers: debt and fraud.

DEBT
  • Creditors of insolvent corporations may seek to hold the shareholders liable for corporate debts.

  • Officers and directors may be held personally liable for corporate checks issued against insufficient funds.

  • Corporation was not adequately capitalized if the undercapitalization is an attempt to avoid future debts of the corporation.

FRAUD
  • Corporation is being used to evade a statutory, contractual or tort responsibility.

  • A corporation is used to hinder, delay or defraud creditors.

  • A fraud would result if the corporate structure were allowed to shield shareholders from liability.

  • Shareholders have used it as a sham to justify wrong, protect fraud or defend crime.

WHAT CAN BE DONE TO AVOID THE PIERCING OR DISREGARDING OF THE LIABILITY SHIELD?

For starters, obviously do not engage in any fraudulent activities and avoid precarious debt situations. In addition, there are several actions that should be taken in order to mitigate risk even further:

SEPARATION
  • Keep corporate and personal funds separated. Commingling of funds is a big strike against you.

  • Personal expenses should never be paid out of the corporate checking account.

  • Make no personal guarantees.

FORMAL PROCEDURES
  • Follow corporate formalities; conduct shareholder and Board of Directors meetings after giving proper notice, issue stock certificates.

  • Follow formalities regarding loans to shareholders; have them properly authorized, documented, arms-length interest rate and terms, require repayment.

  • Pay loans from unrelated creditors before those from shareholders.

FORMAL DOCUMENTATION
  • File your annual report with the Secretary of State and corporate income tax returns on time.

  • Use “Inc.” or “Corp.” on company stationary, contracts, invoices, business cards, etc.

  • Have officers use corporate titles when signing on behalf of the corporation.

IGNORANTIA JURIS NON EXCUSAT (ignorance for the law does not excuse)

Incorporation of your business and following the best practices detailed above will provide a strong foundation upon which a solid wall is built between your business assets and personal property. Nevertheless, a savvy business owner must always remain vigilant. Utilize both internal and external audits to ensure proper accordance with the protocols you have (or will soon have) in place. Allowing an experienced business lawyer to review your company's documents and practices in advance will almost always be less expensive than defending questionable practices under fire.

Topics: Attorneys Savannah GA