You may have established a corporate form for your business (e.g., an LLC, s corp, etc.) for the tax and liability protections its generally provides. However, business owners who fail to maintain corporate formalities can become susceptible to piercing the corporate veil in Florida. Here, you'll learn more about how piercing the corporate veil happens along with information about how to prevent it from happening.
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What is meant by corporate veil?
The corporate veil is a reference to the acknowledgment that some business entity structures (e.g., LLC's, S corps, and C corps) are separate from their business owners. In theory, the corporate entity is its own being with its own liabilities, separate from those of its shareholders or owners, as if a veil existed between the two. The corporate veil makes certain corporate forms preferable to partnerships, sole proprietorships, and other structures.
What is corporate veil protection?
The reason many business owners elect to incorporate a corporation or organize a limited liability company is because of the corporate veil that shields them from the liabilities of the business. These liabilities may include creditors of the corporate entity or those with a potential cause of action against it (e.g., personal injury or wrongful death lawsuits). The corporate veil protection helps the business owner avoid personal liability for the conduct of the entity and prevents creditors from going after their personal assets.
What is piercing the corporate veil in Florida?
Piercing the corporate veil is an attack against the separateness of a corporate form from its owners that creditors will use to hold those owners accountable for the liabilities of the business. Florida law and case law from the Florida Supreme Court will allow the piercing of the corporate veil in circumstances where the corporation or company is not separate and distinct from its owners. Generally, this happens when the entity fails to follow certain corporate formalities that Florida law requires.
Can you pierce the corporate veil in an S corp or C corp, or only an LLC?
You can theoretically pierce the corporate veil of any entity that provides limited liability protection to its owners. This includes S corps, C corps, and LLCs.
How hard is it to pierce the corporate veil?
Piercing the corporate veils usually requires a showing of improper conduct by the entity or the people who control it. The difficulty of doing so will also depend on the reason for piercing in the first place.
Formal piercing of the corporate veil requires a ruling from a court with jurisdiction over the matter (e.g., a district court), which may allow plaintiffs to become judgment creditors against certain shareholders or other business owners. Court proceedings to pierce the corporate veil can take some time, especially if appeals to the Florida Supreme Court occur.
Who is capable of lifting or piercing the corporate veil of an LLC or corporation?
Any creditor of the business is generally able to bring a claim for piercing the corporate veil and holding owners personally liable. Creditors may be customers, clients, business partners, current shareholders, and anyone else with a claim agains the company that might extend to its owners. However, a court and its presiding judge will be responsible for lifting the veil and giving creditors access to the individuals behind the corporation.
Circumstances that may result in a piercing the corporate veil Florida complaint
A piercing the corporate veil Florida complaint will usually require existence of one or more circumstances where a court would determine a lack of separateness between the entity and its owners. The following circumstances are the more common reasons why a piercing challenge may be appropriate.
1. Inadequate capitalization of the corporation or limited liability company
One of the most important corporate formalities that a business with limited liability protection must maintain is having adequate capitalization. Capitalization refers to the capital or corporate assets that the business owns, which can include both liquid and illiquid forms. Some common examples of assets a corporation owns could include:
- real estate
- cash
- equipment/machinery
- accounts receivable
- intellectual property
- other entities under the umbrella of a parent company (i.e., subsidiaries)
- insurance policies
Florida law generally defines adequate capitalization as the entity being able to meet its obligations (i.e., debts and liabilities) as they ordinarily become due. If the corporation's debts greatly outweigh its capitalization, then it may be at risk for a piercing the corporate veil complaint. Owners of the business can always remedy inadequate capitalization through additional capital contributions.
2. Improper purpose and use of the corporation
You must generally use Corporations and other business entities for lawful business purposes. A court will be quick to pierce the corporate veil and hold owners accountable during instances of malfeasance or other improper use of the corporation (e.g., S corp foreign ownership). Other examples may be where the business only serves to shield illegal activity (e.g., tax avoidance, money laundering, other criminal conduct).
3. Commingling of corporate funds
Piercing of the corporate veil will also be likely when commingling of the corporation's capital happens. Commingling is the intertwining of the corporation's assets with those of its owners that makes it difficult to observe any real separation between the two. Some ways the business owners may unintentionally commingle their assets with the company may include:
- not keeping separate bank accounts for the company
- using company funds or assets for personal uses
- failing to maintain corporate records that reflect the separation of assets (e.g., titling corporate property individually)
Examples of piercing corporate veil
The following are hypothetical examples that may constitute a claim or occurrence of piercing the corporate veil.
Not Meeting corporate formalities during dissolution
The members of a real estate LLC have grown tired of each other and would like to end their operation. During their annual meeting, they formalize plans to liquidate the company's assets and dissolve (See our article on how to dissolve a corporation in Florida).
The company sells all of its real estate holdings and pays out the cash proceeds to the members in proportion to their ownership interests. Unfortunately, the company had some outstanding creditors in the form of lenders who had provided initial funds to purchase some of the company's property. The members of the company may now be at risk of a piercing the corporate veil claim because the company lacks the capital to pay its creditors and is inadequately capitalized.
Example of the commingling shareholder
One of the shareholders of an s corp also serves as its treasurer and CFO because of his accounting background and financial acumen. He also happens to be an avid gambler who enjoys the occasional weekend trip to Las Vegas.
During his most recent trip, he hit an unprecedented losing streak. Confident he could win back the money, he dipped into the corporate account and took $1 million to fund his next bet. The loosing streak continued, and he lost everything. The other shareholders of the S corp may seek to pierce the corporate veil and make the CFO personally liable for commingling the corporation's money into his personal account for his gambling habit. A court may view the CFO as an alter ego of the corporation liable for the million dollars he lost.
How do you avoid a situation where you pierce the veil in Florida?
Mitigating the risk of a court piercing the corporate veil requires strict adherence to the corporate formalities that prevent the corporate form from looking like a mere instrumentality. In addition to having adequate capitalization and avoiding commingled funs, businesses should also practice the following.
File necessary forms and pay fees with the state
Florida, like most states, requires limited liability companies and corporations to file documents that reflect key information about the entity in addition to payment of a fee for the privilege of operating in that state. These include the articles of organization for an LLC and articles of incorporation for an s corp or c corp, which state:
- named representative for the entity
- the entity's name and business address
- the names of owners and other leaders (e.g., directors, managers, etc.)
Businesses usually have to file annual reports that certify the entity's continued existence and provide updates with any changes about its key information.
Keep diligent corporate records
Maintaining corporate records is a formality that can help substantiate the separate forms of the entity and the people who own it. An entity's corporate records refer to the accounting books, tax returns, minute books, contracts, and other legal documents concerning the business.
Meeting minutes
An entity should hold meetings of shareholders, directors, or other owners to discuss the company's financial status, ratify key decisions, and confirm any elected or appointed positions. Meeting minutes should reflect the contents of these gatherings and any decisions made therein.
Bylaws and other legal documents
Corporations should have Florida corporation bylaws that provide rules for its governance. In comparison, an LLC should have an operating agreement. Parties should follow the rules and governance structures in these legal documents and update them accordingly.
Finally, business owners should refrain from signing contracts and other legal documents on the company's behalf in the individual name. Rather, owners, managers, and other representatives should sign in their titled capacity.
Final points on piercing the corporate veil Florida
Navigating issues of piercing the corporate veil can be sensitive because of the risk for personal liability. Cueto law group is a business law firm that guides its corporate clients through litigation and claims of piercing the corporate veil along with legal advice for related risk prevention measures. If you or your business have concerns about limited liability protection, consider a consultation with one our attorneys.
FAQs
Below are some brief answers to other common questions about piercing the corporate veil of a LLC or corporation in Florida.
What does piercing the veil of corporate fiction mean?
Piercing the veil of corporate fiction refers to the notion that some corporate entities are a fiction or not real. Rather, they are mere instrumentalities that are indistinguishable from the people who own them. In these cases, owners may be personally liable for the corporation's debts.
Can a corporation be an alter ego of another corporation?
Yes, a corporation can be an alter ego of another corporation. This may happen in the instance of a parent company or parent corporation that owns other corporations or entities known as subsidiaries. Piercing the corporate form of a subsidiary may extend liability to the parent entity.
Is alter ego a legal term?
Yes, alter ego is a legal term in the context of piercing the corporate veil claims in Florida. The term refers to the individuals who constitute the identity of the pierced corporation. They may include a shareholder, member, partner, director, officer, etc who has control over the entity.
