There is a term known as piercing the corporate veil. I have made the point previously that having a “paper judgment” is not a victory. It can sometimes be nothing more than a bad investment to pursue litigation to a judgment only to find that the judgment is not collectible. This is particularly the case when dealing with small corporations or limited liability companies. Corporations and LLC’s are formed for many reasons, but the main reason is to create a shield between the company and the owners where the owners’ personal assets are not at risk if the company fails. This is known as the “corporate veil.” A properly managed corporation or limited liability company will prevent the owners of the company from having personal liability. The company can go out of business, but the owners’ assets will not be at risk if there are judgments against the company.
There are exceptions to the rule that owners are not liable for company debts or obligations. One exception is when the company is used as an “alter ego” of the owners. When a company does not follow corporate formalities, such that there really is no difference between the company and the owners, the courts will “pierce the corporate veil” to make owners liable for the company’s debts or obligations.
Piercing the corporate veil is not easy. The courts take the limitation on liability that corporations and companies provide seriously, as they should. However, in many cases where a company is run so poorly that it leaves a trail of debt and judgments, the company was also run in a way that the corporate veil can be pierced. The best examples are where the company did not file corporate tax returns, and when the owners took money from the company but the company did not report the money as wages or distributions, and the owners did not report the income on personal tax returns. Another example is when one company loans another company owned by the same person or people money, without proper loan documentation and the loan is never repaid. The most convincing cases for piercing the corporate veil involve owners who use the company credit card or bank account as if it was their own credit or money.
Many attorneys can identify situations where the corporate veil might be pierced, but not many attorneys have tried cases to a judge or jury where the veil was successfully pierced. If you have litigation where you think veil-piercing will be necessary to collect your judgment, contact Joel Sannes at Udall Shumway. I have successfully litigated judge and jury trials – and settlements – where the owners were found liable or accepted liability even though they were acting through a corporation or limited liability company.
This blog should be used for informational purposes only. It does not create an attorney-client relationship with any reader and should not be construed as legal advice. If you need legal advice regarding Piercing the Corporate Veil?, or any other commercial litigation matters, please feel free to contact Joel E. Sannes at 480.461.5307, or log on to udallshumway.com, or contact an attorney in your area. Udall Shumway PLC is located in Mesa, Arizona and is a full service law firm. We assist Individuals, families, businesses, schools and municipalities in Mesa and the Phoenix/East Valley.