Shareholders in many corporations enjoy limited liability, which stimulates them to expose themselves to risk and engage in multimillion (sometimes multibillion) business transactions.
This is also the case with LLC members and partners in limited liability partnerships, which enjoy the benefits of limited personal financial liability when their businesses are exposed to debt and bankruptcy.
However, every rule has an exception, which is not different when it comes to limited liability. As provided by law, there are a few occasions in which shareholders can be personally liable for lawsuits and judgments against a company.
In this article, you will discover what you need to know about “piercing the corporate veil” in Florida.
Piercing Corporate Veil – Understanding the Concept
The term “piercing the corporate veil” refers to a legal decision to treat the rights/duties of a corporation as the rights/liabilities of its shareholders. Commonly, a company is treated as a separate legal person, being solely responsible for its debts or liabilities.
Currently, corporate veil piercing is the most litigated issue in US corporate law. Florida courts consider many factors when determining whether or not to pierce a company’s corporate veil.
Common factors include manipulation of assets/liabilities to concentrate them, the intermingling of a corporation’s assets with shareholder’s assets, misrepresentation of members, inaccuracy of corporate records, failure to observe corporate formalities regarding behavior and documentation, etc.
Typically, courts only pierce the corporate veil in cases involving corporations markedly noncompliant with required formalities, preventing fraud, or achieving equity in specific cases involving undercapitalization.
When is It Necessary to Pierce a Corporate Veil?
Let us say you are a business owner who provided goods/services to another company in Florida. However, the company did not pay, and when you tried to sue for payment to collect the court judgment, you discovered that the company was closed and has no assets.
In this case, the company’s owner(s)/shareholder(s) may still have assets, which can be accessed to pay their debt(s) by piercing the corporate veil.
When a court pierces a company’s corporate veil, creditors automatically can go after the owner’s assets to satisfy a corporate debt, which includes properties, bank accounts, investments, vehicles, etc.
Nonetheless, it is necessary to remember that courts will impose personal liability only on the owner(s)/shareholder(s) who are liable for the company’s wrongful actions (debt, fraud, forgery, etc.).
Regardless of the amount of debt owed by a company, no innocent parties can be personally liable for any wrongful actions.
Piercing The Corporate Veil in Florida – In Detail
It is widely known that Florida is a state with a business-oriented profile. The Sunshine State has always been a good state for business, offering several advantages to companies established in the region.
In this sense, Florida courts have a more business-friendly approach than other state courts have. Accordingly, courts are reluctant when it comes to permitting a plaintiff to pierce the corporate veil.
Over time, courts in Florida developed a three-pronged test to determine whether or not it is necessary to pierce a company’s corporate veil. In such cases, all conditions must be satisfied before a court decides to pierce the corporate veil.
The three-pronged test is based on three specific conditions:
- The corporation or business is dominated and controlled by either one or a few shareholders to such an extent that the company’s independent status did not exist. In such cases, the term used to refer to the alleged company wrongdoers is “alter ego.”
- Shareholders failed to adhere/comply with required corporate formalities. Plus, the corporate structure (corporation, LLC, etc.) was used for improper/fraudulent purposes.
- The actions done by the company’s alter ego(s) harmed the plaintiff somehow.
The Importance of Corporate Formalities
Corporate formalities can be understood as a set of steps and precautions that businesses in Florida must take to prevent piercing the corporate veil. These steps are crucial to ensure the company remains legally distinct from its owners.
In this sense, organization when dealing with the company’s assets, documents, and estate must be solid, which includes:
- Ensuring compliance with all legal and administrative requirements,
- Keeping accurate and updated records of the company’s activities,
- Holding regular meetings with corporate members,
- Following the corporation’s bylaws,
- Not engaging in insider deals, insider trading, or other abuses of confidential information,
- Not using corporate funds/assets for personal purposes, and
- Not intermingling corporate funds with personal funds (legally known as “commingling”).
Piercing Corporate Veil in Florida – We Can Help You
If you think you have a case involving piercing corporate veil in Florida, do not waste time with uncertainty. At Jurado & Farshchian, P.L. we have attorneys well-versed in the state and federal law to guide you on what is the best manner to deal with your case.