Business owners often set up corporations as a means of asset protection. A corporate structure for your business can protect an individual from liability from a company’s debt. The piercing of the veil allows a plaintiff to attack the individual’s personal assets, as well as the assets of the business. This type of suit is prevalent when the corporation’s shareholders or limited liability company’s members have more assets than that of the company.
Some say that piercing of the corporate veil is the most litigated corporate law issue. The Courts use the following as a list to determine whether or not the corporation was an “alter ego” of the individual; unity of interest, wrongful conduct, and proximate cause. However this list fails to explain the real world approach the Courts have taken.
While the alter ego doctrine has been used against both limited liability companies and corporations in the past, the statute supporting alter ego technically only applied to corporations. However, in the most recent case heard by the Nevada Supreme Court regarding this issue, Gardner v. The Eighth Judicial District Court of Nevada, 133 Nev. Adv. Rep. 89 the Court decided what it would only previously recognize or apply, in that the alter ego doctrine applies to limited liability companies the same way it applies to corporations stating “We conclude that NRS 86.371 is not intended to shield members or managers from liability for personal negligence. We further conclude that the corporate alter ego doctrine applies to LLCs.”
The following is a list of factors that the Courts have taken in determining whether or not the corporate veil should be pierced:
Corporate Records
The companies financial records must be maintained and documented. Most states also require that stockholder and board of directors meet annually, if not more frequently, to discuss the operation of the business. Not only must these meetings occur, but an accounting of them must be maintained within the company. This accounting can be minutes, resolution, etc. Failure to maintain these documents is evaluated by the Court.
Financial Transactions
The Court will look at whether the business had its own bank account with bank cards and checks, and whether or not the funds in the business account were used for only business purposes.
Capitalization
Businesses must be fully capitalized. While the amount varies in each industry, the failure to capitalize your company has been used by the Court as an indication the business was in fact the alter ego.
Treatment of Assets
The Court will look at how corporate assets were treated. If they were treated by the individual as his/her personal assets, the Court may determine that a piercing of the corporate veil is appropriate.
Failure to Pay Dividends
Failure to pay dividends is not determinative of whether the corporate veil has been pierced, but if the payment of dividends was appropriate and the person failed to pay them, this might indicate that he was in fact the alter ego of the company.
This is not an exhaustive list and not all factors must be met for a Court to pierce the corporate veil. Instead the Court weighs these and other factors to determine whether the business was used as the alter ego of the company.
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