Corporate formalities build a wall against those who would pierce the corporate veil

“Piercing the corporate veil” is the judicial act of imposing personal liability on otherwise immune corporation officers, directors, or shareholders for the corporation’s wrongful acts. A piercing happened on July 2013 in the case of Springfield v Palco, 2013-Ohio-2348.   What happened:  After a city obtained judgment against a corporation that was owned by a single shareholder, the company transferred all of its real estate out the corporation’s name and into the sole shareholder’s name. The court explained that the corporate form normally creates a division between shareholders and their business. It preserves limited liability by distinguishing between corporate debts & property compared to individual debts & assets. But in certain circumstances, the corporate form may be disregarded allowing bill collectors to reach the personal assets of shareholders. The corporate veil may be pierced if a court finds: (1) Control by shareholders was so complete that the company has no separate mind; (2) Control enabled an unlawful or illegal act, or fraud against the one seeking to collect the debt; and (3) The result of the act was an injury or unjust loss. Bottom line: In determining whether the shareholders of a corporation can be reached for debt collection, courts consider: (1) If corporate formalities were observed; (2) If corporate records were kept; (3) If corporate funds were kept separate from the shareholder’s personal accounts; (4) If corporate property was used for personal purposes; (5) If the company is grossly under-capitalized.  Reminder:  After incorporating or forming an LLC, business owners should continue to attend to corporate formalities including annual meetings and record keeping.