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A CORPORATE ENTITY: A MEANS TO LIMITING LIABILITY, BUT NOT JUST A SHIELD

Jul 2012 , Vol. VI, No.1

Authored by attorney Sean Golden

It is an all-too-commonly held belief that, by merely registering an organization as a corporation or limited liability company with the State Corporation Commission, or by signing a corporation’s name to a contract, those individuals can totally shield themselves from liabilities associated with that corporation or LLC.  This isn’t necessarily the case, however. 

It is true that a corporation is a legal entity that is separate and distinct from its stockholders, members, or owners.  And, it is also true that when a corporation ‘causes injury,’ it is the corporation that is directly liable, not the owners or shareholders.  That being said, when the stockholders, members, or owners of a corporation or LLC fail to follow the necessary corporate formalities, or when it becomes apparent that the corporation is being used essentially as a legal ‘stooge’ merely for the purpose of avoiding personal liabilities, a court may disregard the corporate entity and find the corporation’s individual shareholders personally liable.  This phenomenon is called “piercing the corporate veil.”   

Below are a few traits or factors that courts will consider when piercing the veil of a corporation and finding individual owners liable:

Note that when courts pierce the corporate veil, it is usually for small, closely held corporations.  The lessen for owners of closely-held corporations or members of LLC’s is to pay attention to the details in managing the company, to jump through the necessary hoops, and to follow the formalities in order to ensure that you’re maintaining your legal protection.

Authored by attorney Sean Golden, these articles are meant to bring awareness to these topics and are not intended to be used as legal advice.  For more information, contact Mike Sterling or Bill Franczek at 757-446-8600. Visit www.vanblk.com, for our library of Construction Law Tips. Suggestions for a topic? E-mail bfranczek@vanblk.com.

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