Builders and Contractors Exchange
Weekly Bulletin: 04 Jan 2004
Keep Your Corporate "Veil" Intact
By: Christopher Ambrosio
Most contractors conduct business through a separate entity, usually a corporation or a limited liability company. (Although they have different characteristics, both will be referred to as "corporations" in this article.) Those that are not should strongly consider incorporating. When a business is incorporated, all transactions are conducted in the name of the corporation, which has its own office, bank account, letterhead, and other tangible and intangible assets, and which serves as the principal party to contracts, loans, and other business arrangements. In other words, the corporation is considered a separate "person" apart from the individual(s) who own it. The reason for operating in the corporate form is to insulate the individual owners' assets from any liabilities that the business may incur, such as debts owed to lenders or suppliers or personal injuries or property damage sustained by others.
In some circumstances, however, the protection offered by the corporate form may be compromised. This is called "piercing the corporate veil." When the corporate veil is pierced, the individual owner(s) are personally responsible for paying the debts or liabilities of the business, even if they were incurred by the corporation.
There are no hard and fast rules governing a court's decision to pierce the corporate veil. While Virginia courts are generally reluctant to pierce the corporate veil, they are more likely to do so when one or more of the following factors are present:
- The corporation is used by its owners to perpetrate fraud or disguise wrongful acts;
- The corporation is merely the "alter ego" of its owners;
- The corporation is substantially undercapitalized, other than as related to a legitimate bankruptcy filing;
- The owners and officers of the corporation fail to follow corporate formalities, i.e. proper registration and filings with the State Corporation Commission, regular meetings or written consent agreements in lieu of meetings, and maintenance of proper books and records; or
- The owners commingle their personal assets with those of the corporation and vice versa.
Even though veil piercing is unusual in Virginia, contractors should take great care to treat their corporation as a separate "person" distinct from the individuals who own it, to follow the required formalities of registering and managing the corporation, and to segregate and account for corporate assets separately from personal assets.
Questions?
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This article is meant to bring awareness to this topic and is not intended to be used as legal advice.