Schedule a free one-half hour consultation

Failure to Properly Incorporate and Piercing the Corporate Veil

Hypothetical:  Mary works in human resources during the week. On weekends she makes fantastic floral arrangements for her friends’ weddings.  Mary unexpectedly gets laid off. She decides to turn her hobby into a business. Mary talks to her friends who own their own businesses on how to proceed.  Mary goes to the Secretary of State’s office and files the Articles of Incorporation for Mary’s Wedding Flowers, Inc.  On the day Mary opens up her flower shop, she immediately is swamped with business.  She doesn’t meet with any professionals, including an accountant or an attorney because she can do all of this herself. Mary feels good because now that she incorporated with the Secretary of State she is an S-Corp. She deposits the money that she receives from her business into her personal checking account, and everything is great. Then Mary gets into a dispute with one of her wholesalers, and Mary gets sued by the wholesaler.  In the lawsuit, one of the claims is to pierce the corporate veil.  Mary is not concerned about the claim of piercing the corporate veil because she has the document from the Secretary of State showing that she is incorporated.  She decides to consult with a business attorney.

Mary’s business is neither properly incorporated nor is the business an S-Corp for tax purposes. Mary soon learns from her counsel that receiving a document showing that you are incorporated does not mean that Mary’s company is properly “incorporated” pursuant to Minnesota laws nor does she have an S-Corp election (but rather the corporation is a C-Corp.). Mary learns that she did not properly incorporate and she has not followed corporate formalities (also she finds out that she is going to have significant tax consequences because she did not properly request S-Corp. election from the Internal Revenue Service). Most likely, the corporate veil will be pierced as Mary has no minutes showing that shares were issued, a board of directors was approved, the board of directors (herself) met, officers were elected, and that the shareholder (herself) approved the board of directors actions, and she treated her business as her personal bank (rather than separating the business from her personal).

Spangler and de Stefano, PLLP assists business owners with the proper formation of their corporation, maintaining proper corporate books, and following corporate formalities. Working with experienced business attorneys (and a business accountant) prior to forming your company is critical to maintaining a corporate veil that prevents personal assets from being seized to pay for a business judgment.

The material contained herein is for informational purposes only, and is not intended to create or constitute an attorney-client relationship between Spangler and de Stefano, PLLP and the reader. The information contained herein is not offered as legal advice and should not be construed as legal advice.