What is Piercing the Corporate Veil? How to Avoid It?
In this blogpost, we will talk about piercing the corporate veil which is an important legal issue for our followers who are interested in forming a Corporation or LLC and even for those who want to buy a house or real estate in the US.
As we stated in our relevant blogs on forming a Corporation and forming an LLC, these business structures including S Corporations provide limited liability to their members/shareholders and this is the most conspicuous advantage of them. When they are properly formed and maintained members/shareholders normally will not be held personally liable with their personal assets for the liabilities of the company. Furthermore, they offer several tax benefits.
What is Piercing the Corporate Veil?
The Corporate Veil refers to the separation of a corporation’s identity from its owners/members. As soon as articles of organization are filed and submitted duly, the Corporation is accepted to be established within the capacity to have rights and obligations of being a separate entity. One important caveat here is that we use Corporation term for LLCs and Limited Partnerships as well as corporation type of business structures. This is because piercing the corporate veil is not a legal problem limited to corporations. Such information found in several sources is wrong.
Piercing the corporate veil refers to a legal problem in which a court removes the separation of owners, members, shareholders, and the corporate entity and holds them liable for corporations’ debts and actions personally. For example, when an individual or another company sues a corporation claiming a debt or anything subject to compensation under normal circumstances, owners/member are not held responsible for their personal assets. Although regulations vary from state to state, one can say that courts have a strong common stance regarding not piercing the corporate veil. However, one should know that if courts conclude that the owners/members abused the corporation form and /or fraudulent activities occurred, they would pierce the corporate veil and this would result in serious consequences. Let's have a closer look at these situations below.
When Does Piercing the Corporate Veil Apply?
The most common actions/situations that could cause piercing the corporate veil are as follows:
· Fraud and fraudulent activities
If the courts determine that the corporation was established to make sham and deceitful deals and involve in deceptive activities, in other words, determine that there was no real separation of members/shareholders from the corporation’s entity, they can remove the protection and owners/shareholders might be sued.
· Co-mingling of personal and corporate assets/funds
Steering corporate assets for personal purposes without proper documentation, providing a loan or an offer request to a shareholder/member anomalously are among the most prominent examples of such misuses. Furthermore, failure to title corporate assets in the corporate name, failure to utilize separate bank accounts (e.g. performing financial transactions with personal bank accounts) or failure to record an appropriate resolution, sign a promissory note, charge a fair market rate interest in debt/credit relationships between corporation and shareholders/members or owner could cause such an inter-mingling problem.
· Lack of adherence to corporation formalities
Failure to maintain a stock ledger, hold annual meetings, record corporate minutes, make regular filings, adopt or update bylaws would be among the factors courts might consider when giving a ruling on a claim of piercing the corporate veil.
· Undercapitalization & Piercing the Corporate Veil
Corporations should have enough capital both in the formation stage and in meeting other short and long term obligations. If the corporation is not fortified with sufficient sources compared to similar companies in a similar business. , a claimant can argue that raison d'être of the company was merely a cover to protect personal assets. This would also be another matter of consideration for the courts
· Domination of Shareholders over board of directors & officers
Lack of votes to approve significant decisions, failure to appoint or respect board of directors and officers are examples of this kind of domination
How to Avoid Piercing the Corporate Veil
First of all, the aforementioned situations that might cause the removal of protection are not exhaustive. It is always possible to encounter different matters in dispute which converges on the dissolving of separation of owners/members from the corporate entity and consequently piercing the corporate veil. Nevertheless, the following recommendations would be useful to raise the corporate veil and maintain it.
·To keep corporate charters creditable, annual filings should be performed timely and meticulously.
For example, in many states filing an annual report which indicates the names and addresses of company officials and directors is mandatory. Failure to do this may result in revoking the corporate charter.
·Determine all intra-company formalities since the very beginning of the incorporation and perform all business actions accordingly.
Creating and updating Bylaws would provide important guidance for a wide variety of issues ranging from the schedule of company meetings to voting regulations, from appointment/dismissal of directors and officers to decision making procedures and corporation's future strategies. All operations/actions within the corporation should be in accordance with bylaws. Rule-bound structure of the corporation would be one of the most prominent indications against piercing the corporate veil.
·Keep corporate records, maintain an up-to-date corporate minute
Since the very beginning of formation, you should record all decisions made in annual and special meetings as stipulated by bylaws. This would be another strong indicator of a separate corporate identity.
·Give prominence to your corporate identity.
You should engage in all contracts, perform all business transactions and activities evidently as a corporation. Directors and officers should be able to prove that they are operating in their capacity when fulfilling their duties. Business cards, invoices, letterheaded papers, corporate web sites should reflect the corporation as a separate entity having its own legal capacity.
Although many states don’t regard insufficient capitalization as a sole reason to remove the corporate veil, it would be wise to provide the corporation with enough financial sources to pre-empt future claims regarding the piercing of corporate veil. Moreover, several states such as California are more inclined to remove corporate veil protection due to undercapitalization.
·Ensure the separation of corporate assets from personal assets and maintain it.
Loans given to individuals, shared tax returns and bank accounts, personal use of corporate assets are all wrong practices that peril the separation of corporate identity from its owners/shareholders. Needless to say, lending to Officers, Directors or Shareholders would be an even worse signal.
·If you have more than one corporation;
Avoid identical stock ownership of several corporations. You should also refrain from having similar officers and directors. Moreover, it would be beneficial for you to use different business addresses, telephone, and employees.
As we mentioned above, removal of limited liability in corporations, LLCs and LPs aka piercing the corporate veil is a legal issue that carries the potential of bearing serious consequences. Therefore, receiving solid and reliable legal support and guidance from the very beginning of the formation of the corporation and after appears as a necessity to handle this complicated and multidimensional problem. Irrespective of your position in such a lawsuit, be it a claimant or defendant, managing the process with a subject-area lawyer would be inevitable.
John Onal & Associates PC is a law office specialized in Corporate and Business Law, Immigration Law, the US Visa Processes, Intellectual Property, and Real Estate Law. We deliver reliable advice in a large variety of subjects ranging from piercing the corporate veil, forming a corporation and buying a house in the US to trademark registration and Green Card applications (e.g., EB3 Visa or DV Lottery). With exceptional knowledge and insight into the immigration law, our experienced lawyers at John Onal & Associates PC are ready to help and respond to all your inquiries related to the F2A category, a hot topic issue right now.
You can also visit our office directly, e-mail us or phone.
Amerika turist vizesi, Amerika vize muafiyet programı, vize muafiyet programı, visa waiver program, Avukat Fatih YİĞİT, Avukat John Önal, Avukat Fatih Yigit, Avukat Fatih Yiğit, amerika göçmenlik avukatı, amerika türk avukat, abd göçmenlik, amerika iltica avukatı, amerika vizesi nasıl alınır, amerika yatırım, amerika vizesi nedir, amerika şirket kurmak, amerika vize, amerika yatırımcı vizesi, amerika yatırımcı vizesi şartları, amerika vize görüşmesi, amerika vizesi almak, amerika vatandaşı olmak, amerika vatandaşı nasıl olunur, amerika vizesini nasıl aldım, amerika öğrenci vizesi, amerika çalışma vizesi,Amerikada ev almak, ABD de ev almak, amerikada marka tecsili, amerikada şirket kurmak, newyorkta avukat, Turkish lawyer newyork, Turkish attorney, dv lottery 2020, dv lottery başvuru, dv lottery başvuru tarihleri, Green card başvurusu nasıl yapılır, Green card başvurusu, Green card başvuru, Green card başvuru ne zaman, Green card başvuru formu, Green card 2020, Green card 2020 başvuru, Green card 2020 ne zaman, amerika Green card, amerika Green card nasıl alınır, abd Green card, abd Green card nasıl alınır, Green card kazandım, Sercan Önal, Green card kazanma şansı, Green card nedir, ogmen law, us immigration lawyer, us immigrant visa, naturalization, us nonimmigrant visa, usa visa apply, us asylum process, how to get us visa, usa investment visa, us immigration news, us Green card lottery, Green card process, us investor Green card, us nonimmigrant visa interview, apply for us citizenship, us immigration visa interview, how can i get us visa, Avukat Sercan Önal, e2 visa interview questions, eb 5 visa program, Green card process, Green card processing time, marka tescili, dv lottery 2020, dv lottery 2020 application, Green card registration, dv lottery 2020 application form online, us Green card lottery, us Green card lottery 2020, us Green card lottery application form, how to apply dv lottery 2020, how to apply Green card, Green card requirements, amerikada türk avukat, how to win Green card lottery usa, Green card interview, Green card 2020 application, when and how to apply for dv 2020,trademark registration.intellectual property.newyorkta avukat, newyorkta türk avukat, new york attorney, new york lawyer, new york turkish attorney, new york turkish lawyer, H1B vizesi, I-9 formu,piercing the corporate veil,h1b visa, I-539 formu, work and travel ile gidip amerikada kalmak, l1 vizesi , eb3 visa , Amerikan vatandaşlığı, abd vatandaşlığı , j1 to f1 , citizenship by naturalization , forming a corportion , f2a category , llc nedir , şirketlerin kurumsal perdesinin kaldiırılması , abd konsolosluğu green card başvurusu, adjustment of status, Amerika vizesi, Amerika tüccar vizesi, Form I-539, USCIS, Form i-539, Form i539, E-1 vizesi, E-2 vizesi, e1 vizesi, E-1 tüccar vizesi, E-2 Yatırımcı vizesi, e1 tüccar vizesi, e2 yatırımcı vizesi, e1 vizesi, e2 vizesi, E-1 vizesi E-2 vizesi farkı, EB-5 vizesi, EB-5 yatırım programı, EB-5 yatırımcı vizesi, green card, yeşilkart, oturum izni, B1 vizesi, B2 vizesi, turist vizesi, iş gezisi vizesi, B1 ve B2 vizesi, Amerika’da ev, Amerika’da emlak, Amerika’da ev almak, Amerika’da emlak almak, Amerika çalışma vizesi, çalışma vizesi, Amerika işçi vizesi, Amerika çalışma vizesi başvuru, Buying a house in the U.S., Buying a property in the U.S., buying a real estate in the U.S., House in America, real estate in America, property in America, House in the U.S., real estate in the U.S, property in the US, F-1 student visa, student visa, O-1 Vizesi, O-1 Olağanüstü Yetenek Vizesi, O vizesi, O-1A vizesi, O-1B vizesi, O-1 vizesi, O-3 vizesi, O1 vizesi şartları, O1 vizesi, O1 vizesi belgeler, O vizesi, O1A vizesi, O1B vizesi, Amerika I vizesi, amerika i vizesi, Amerika medya vizesi, Amerika basın vizesi, abd basın vizesi, Amerika I medya vizesi, i vizesi, ABD medya vizesi, ABD I vizesi, medya temsilcisi, Amerika vizesi, J1 vizesi, j1 ziyaretçi değişim programı, Amerika vizesi, abd vizesi, Amerikan vizesi, ABD vize türü, amerika vize kategorileri, i9 formu, I-9 formu, llc in the usa, h1b vizesi için i9 formu, e2 vizesi yenileme
They Also Read
Forming an LLC in the US is one of the most common issues for many people seeking opportunities to start a business in the US. LLC, a Limited Liability Company. It is a specific business and partnership structure in the United States. In this blogpost we will discuss forming an LLC in the US, investing in America and starting a business in the USA. Let’s take a look at LLC in the US and how to form an LLC in America?..MORE INFORMATION