Do you know what piercing the corporate veil of an LLC means? If the answer is no, then this article is for you. If you are running an LLC in Florida or are in the process of starting one, understanding what the corporate veil is and when someone can pierce this veil is vital. Read on to learn what you need to know directly from an experienced Florida Business Attorney.
The Corporate Veil – What is It?
When you incorporate a business, you and your partners create an entity legally separate from your personal finances. This separation is one of the most critical advantages of establishing a corporation or an LLC. Individuals, organizations, or even shareholders may file lawsuits against your business. However, because an incorporated entity and its owners are legally separate, judgments for any business lawsuit will be held against the business and not its owners. The legal barrier that protects the assets and finances of the owners of corporations and limited liability companies is known as the corporate veil.
The owners of a corporation or LLC, however, are not fully protected in all cases. As a result, although impenetrable in most cases, the corporate veil can sometimes be legally pierced. Piercing an LLC’s corporate veil means that the personal assets of some or all of the members become vulnerable to creditors.
This piercing can occur most often during business litigation.
Piercing the Corporate Veil of an LLC – When It Can Happen
Piercing the corporate veil of a company is not easy. This barrier is not tangible; however, it is challenging to penetrate. Therefore, someone suing must provide much evidence showing why a court should pierce an LLC’s or corporation’s veil for a Florida court to do so.
The reasons why piercing the corporate veil of an LLC may be necessary include:
Mere Instrumentality or Alter Ego
Case law in the Florida courts has molded the standards necessary for piercing an LLC’s corporate veil. To legally pierce the corporate veil of a particular LLC, a plaintiff must prove that the company is but an alter ego of the owner. In other words, they must prove that the company is not an independent entity but an extension of its owner.
One of the most common ways companies become alter egos of their owners is by the owners commingling business and personal funds. For example, the owner of an LLC might pay for a personal meal or perhaps a vacation trip using the LLC’s money. Unfortunately, doing so is a big problem. It does not matter if you are the owner of a company; you cannot simply take out money from your company’s account to pay for personal expenses. Why? Because the employees and the shareholders of a company must be paid a certain way.
Improper Conduct or Purpose
Once a plaintiff establishes that an LLC is but an alter ego of its owner, a plaintiff must prove that the owner took improper actions. Proving so is usually more challenging than unveiling the alter-ego nature of a company. However, a plaintiff can show the owner’s improper actions by providing evidence showing that the LLC was formed for a purpose other than to make money.
After successfully piercing the corporate veil of an LLC and establishing that the company owes money to an individual or organization, the creditor can then place a lien against the personal assets of the company’s owners in addition to taking other legal collection actions.