|
Robert M.
Ibraham |
Attorney &
Counselor At Law |
| |
Admitted in
New York & Connecticut |
Piercing The Corporate Veil
The
establishment of a corporation creates an entity that can be
distinguished from its owners. Therefore in the event of
creditor or litigants trying to collect on a debt or some claim
of negligence, the owners would not bear any of that liability;
in other words the corporation would only be liable to the
extent that it had assets.
With that said,
there are a few ways that a creditor/plaintiff can get around
the "corporate shield" and be permitted to look to the owner(s)
for redemption. The three most common scenarios are under
capitalization, what is referred to as the "corporate alter ego"
and notice.
The theory of
under capitalization is that any corporation that can be held
only responsible to the extent that it has assets must be
established with assets enough to cover any anticipated claims.
So, a corporation should not be formed without any transfer of
tools, vehicles, supplies or initial funding in to the corporate
name. Now this burden is somewhat vitiated with the
security of an adequate insurance policy; but even with a policy
in place some assets should be placed in the corporation's name:
PARTICULARLY the vehicle. This is probably the most common
mistake I see, a corporation is established, but the van/truck
is maintained in the individuals name. If either the
owner, or one of his employees is involved in an accident, they
can be named individually. In that case, the corporation's
establishment was in vane. It should be noted that in any
event the driver will be named in a lawsuit, regardless of whose
name the vehicle is in, but an employee can seek indemnification
from its employer, the corporation. This is know as
respondent superior. Latin for "let the master answer".
The second most
common way to pierce the corporate veil is known as the
"corporate alter ego". It's when a claimant alleges that
the corporation was established purely for the purpose of
creating a shield from liability. Now I must be allowed to
explain, because that is the reason that any corporation is
established. The claimant may allege that the corporation
was conducting less than ethical business, or that was not
complying with the formalities required by the State and that
the corporation was nothing but the "alter ego" of the owner;
and as such should not be entitled to its benefits.
The last
scenario is that of notice, to obtain the benefit of the
corporate shield, you must put everyone on notice that they are
getting involved with a corporation, this way they are on notice
of the limitation of liability. O.K., here is the
situation. Joe's been doing electrical work on the side
for years, never as a corporation. He has the same clients
over and over and all new clients are referrals. Joe
decides to establish a corporation, after doing so he goes into
a previous clients house and his worker crosses wires resulting
in a short and a house fire. Homeowner sues Joe
personally; Joe says "ah-ha you can't sue me: I'm a
corporation." Unless Joe can show that the homeowner was
on notice that they were getting involved with Joe's Electric,
Inc., rather than Joe the electrician, there is a good argument
to hold Joe personally responsible. With that said, be
sure all invoices, checks, contracts, proposals, accounts have
the corporate name on them. Also be sure, when opening
accounts at supply houses, or signing for materials that you
sign as President.
As always, if
there are any questions, please feel free to call me at (631)
589-0590. Lastly, please note my change of address listed
below.
18 Trout Street
Oakdale, NY 11769
Phone/Fax: 631-589-0590
 |
