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Limited liability: 3 key factors in piercing the corporate veil

On Behalf of | Jun 16, 2023 | collections

Business entities provide entrepreneurs and investors with a crucial shield, separating their personal assets from the liabilities of the business entity they establish. This safeguard allows individuals to take risks and pursue entrepreneurial endeavors with a sense of security.

However, there are instances where this protective barrier can be pierced, exposing business owners to personal liability. This phenomenon, known as piercing the corporate veil, is a complex and multifaceted concept that intertwines the principles of limited liability and justice.

In other words, having a corporate structure is not always sufficient to avoid personal liability. Below are common factors that can lead to piercing the corporate veil in Florida.

1. Fraud, wrongdoing or injustices to third parties

When a company engages in wrongful actions, such as transferring assets to evade creditors, the individuals behind it cannot hide behind the law. For instance, if a debtor shuts down one corporation and opens another with the same assets and employees, it suggests fraudulent intent. Courts closely scrutinize such conduct, and shareholders can be held personally.

2. Failure to maintain a separate identity between the company and owners

Interweaving the company’s identity with that of its owners or shareholders can undermine the corporate veil. Some ways this can happen include operating out of personal accounts, disregarding corporate formalities and treating company assets as personal assets. It erodes the separation between the individual and the entity.

3. Failure to maintain the separate identities of affiliated companies

When multiple affiliated companies operate under the umbrella of a parent company, failing to maintain their separate identities can raise suspicion. For instance, if a subsidiary company shares officers, addresses, contracts and financial obligations with its parent company, it may be deemed an ‘extension’ of the parent. Courts will assess the relationship between parent and subsidiary corporations to determine if they function as one entity.

If you are owed money by a company or business entity, having the necessary guidance can help you get through the complexities of piercing the corporate veil and increase your chances of a successful outcome.