Piercing the Corporate Veil: Corporate Formalities and Business Records

Corporations are generally treated as a separate entity from its owners.[1]  However, the owners of a corporation (i.e. shareholders) might be held personally responsible for the debts of the corporation. Generally, this can happen when a court allows creditors to “pierce the corporate veil.”  A common deficiency that might lead to piercing the veil is the failure to follow corporate formalities.

Small businesses are less likely to follow corporate formalities.  These entities are more at risk of having the corporate veil pierced.  Corporations should comply with all contractual and statutory formalities, including, in part:

  • Hold annual meetings of directors and shareholders;
  • Keep accurate and detailed “minutes” that document the decisions and issues addressed during a meeting;
  • Adopt and maintain company bylaws;
  • Make sure that the officers, agents, directors, and shareholders abide by the bylaws;
  • Ensure the formation documents were properly filed and recorded;
  • Renew the entity and update the public record on a timely basis to avoid any lapse in registration; and
  • Maintain separate accounts and do not commingle the entity’s financial assets with the owners’ personal assets or make them available for personal use.

Following the formalities of a corporation is important to defend against an attack that tries to pierce the corporate veil.  Ultimately, a court might consider various factors when determining to pierce the corporate veil, such as evaluating whether:  (1) a corporation was engaged in fraud or promotes injustice; (2) an entity was inadequately capitalized; (3) an entity is an alter ego of another individual or group of individuals; and (4) an entity fails to follow corporate formalities.

If your company is at risk, you might consider having a qualified attorney assist in completing the corporation’s annual minutes.  In some cases a complete legal audit might prove beneficial to indentify vulnerabilities and additional risks from failing to maintain proper formalities.

[1] E.g., United States v. Bestfoods, 524 U.S. 51, 55-56 (1998).

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