Piercing the Corporate Veil
Hypothetical: You open up a flower shop. You file as a business entity with the State of Minnesota, but do not have any other corporate documents. Your business uses your personal account for the business. You and your business are then sued when a customer stumbles and falls when coming into your business to pick up a floral arrangement.
Punishment: If you do not follow corporate formalities, and your business is sued, the court can pierce the corporate veil and seize your personal assets to pay a business debt.
Factors that the court considers are:
- Insufficient capitalization;
- Failure to observe corporate formalities;
- Nonpayment of dividends;
- Insolvency of debtor corporation at time of transaction in question;
- Siphoning of funds by dominant shareholder (this could be called inequitable distributions);
- Nonfunctioning officers and directors;
- Absence of corporate records; and
- Existence of the corporation as merely a façade for individual dealing
Below are a couple examples that can cause additional consequences outside of “simply” piercing the corporate veil:
1) You did not charge sales tax. As a result, Minnesota Revenue assessed sales tax on all of your funds deposited into your personal account even though not all of your funds were you’re your business.
2) You did not keep the receipts because you charged everything on a credit card, and you believed, after reading it on the internet, that your credit card statement was sufficient. When you are audited, you are shocked when you find out that isn’t the case, and you are devastated when the IRS determines that you do not have any reasonable and necessary business expenses because you do not have receipts.
It is wise and prudent to utilize the assistance of a business attorney when starting a business. Spangler and de Stefano, PLLP are experienced business attorneys.
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.