Business owners beware: corporate liability revealed…

February 6, 2012 — Leave a comment

20120207-210455.jpg

In our practice, we are often asked what formalities need to be followed to ensure that corporate liability doesn’t pass to individual shareholders or officers. Maintenance of corporate formalities is essential to maintain the limit’s of liability, By way of example, in the District of Columbia, a Court will consider piercing a corporation’s veil when any or all of the following factors are present:

1- Unity of interest and ownership.

  1. Whether corporate formalities have been disregarded, like issuance or subscription of stock.
  2. Whether there has been intermingling of funds, staff and property.
  3. Domination and control of a Corporation (ex: Parent – subsidiary).
  4. Extensive commingling of personal funds with corporate funds.
  5. Substantial disregard for corporate formalities, like keeping the minutes and records of the corporation.
  6. Inadequate initial capitalization.
  7. Whether corporate funds and assets were diverted to non-corporate used, such as personal use.

2- Fraudulent use of a Corporation formed to protect business from claims of creditors.

  1. a. The Courts have modified this part of the test as follows: It is no longer necessary to prove fraud. Instead of fraud, the Court may consider justice and equity in their determination.

3- Control and breach of duty set forth in the first two elements is what caused the injury or unjust loss complained of.

  1. This element is rarely ever used by the DC Courts. However, it has been mentioned in some D.C. cases which deal with piercing the corporate veil.

NOTES:

1- Because piercing the veil is a doctrine of equity, the factor that predominates will vary in each case and the decision to pierce will be influenced by considerations of who should bear the risk of loss and what degree of legitimacy exists for those claiming the limited liability protection of a corporation.

2- Before a Corporate entity can be disregarded and acts of a corporation can be legally recognized as a particular person, it must appear that the corporation is not only controlled by the persons, but also that the separateness of the persons and corporation has ceased and facts must be such that adherence to fiction of separate existence of the corporation would sanction fraud or promote injustice.

3- Piercing the corporate veil is an equitable doctrine, but the issue of whether the corporate veil should be pierced is properly submitted to a jury.

Sources:

1- Simon v. Circle Associates, Inc. 753 A.2d 1006, (2000)

2- Vuitch v. Furr 482 A.2d 811, (1984)

3- Camacho v. 1440 Rhode Island Avenue Corporation and Arven Plumley 620 A.2d 242, (1993)

Peter Antonoplos is a Partner at the law firm, JDKatz, P.C.. He specializes in corporate, tax, and real-estate law and frequently lectures in the Washington D.C. metro area.

No Comments

Be the first to start the conversation!

Add your $0.02

Please log in using one of these methods to post your comment:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s