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Protecting the Corporate Veil

September 11, 2009
Filed under Legal Experts

Jim KrendlIn my experience, most dealerships are incorporated. The primary reason to incorporate is to have the protection of limited liability. That means the corporation, not its individual shareholders, is liable for the company’s debts and other actions (except when, on a bank loan for example, the shareholders sign personal guarantees). Plaintiffs constantly seek ways to hold the individual owners, rather than the corporation, liable for corporate debts and other liabilities, personal injury accident, for example. A popular way of doing this is to try to “pierce the corporate veil.”  When a plaintiff is successful in doing this, the shareholders (or in some cases officers, directors and employees) are individually liable for the corporation’s acts.

Rules for piercing the corporate veil vary from one state to another. However, here are some good rules to avoid piercing the veil:

1. Follow corporate formalities. Make sure the corporation is in compliance with filing and other legal requirements. Hold and document directors and shareholders meetings at least annually.

2. Make sure the public knows they are dealing with a corporation. For example, include the “Inc.” part of the corporate name as part of the signage, standard forms, bank accounts, etc.; when signing documents, use the corporate name and your formal title as a corporate officer.

3. Capitalize the corporation adequately. A common way of piercing the veil is to prove that it was “undercapitalized” for the type of business it was in.

4. Avoid intermingling your personal activities and assets with those of the corporation. Keep a distinct line between your property and the corporation’s property.

DISCLAIMER: This blog is a highly simplified general discussion. It is not legal advice.  Such advice should come solely from qualified legal counsel who understands your situation and who is familiar with all relevant facts, variations in state and local laws that may apply to you, and other matters beyond the scope of this blog.

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