By: Donald C. Turner
Most closely-held businesses operate as either corporations, limited liability companies, or limited partnerships. There are many reasons for doing so, including tax implications. One of the primary reasons for operating in such a fashion is to protect the individual owners from personal liability for the obligations of the business enterprises. These entities can be very effective in providing their owners with this protection.
Despite these protections, there are certain limited ways in which a creditor of the business enterprise can “pierce the corporate veil” for the purpose of imposing personal liability on the owners of that enterprise. Under the common law of Pennsylvania, such piercing is warranted in the event (1) the entity is not properly organized, (2) the entity is not sufficiently capitalized, (3) the entity fails to adhere to applicable corporate formalities in authorizing transactions and in executing documents and/or in co-mingling corporate and personal funds, or (4) the entity is used to perpetrate a fraud.
Most of these means to “pierce the corporate veil” can be avoided with careful planning, particularly in connection with the formation of the business enterprise, the documentation and authorization of the enterprise’s contractual obligations, and the means by which corporate funds are paid to the owners.
In these times of dwindling business revenues, creditors are more and more frequently seeking to pierce the corporate veil. As a result, now, more than ever, business owners should make certain that they organize their enterprises, operate them, and pay themselves in a manner which minimizes such possibilities.
For more information please contact Don Turner.