The Mistake of a Business Owner Regarding Co-Mingling

It is essential that you keep each business entity’s operations separate from the other. If you start co-mingling assets, most likely you will have waived your corporate veil. If your business entity does not have a corporate veil, the business assets of Company A can be subject to be seized to pay the judgment of Company B and your personal assets can be seized to pay the entity’s judgments.

It is prudent that you operate each business entity separately and that you do not co-mingle the operations of different business entities to avoid piercing of the corporate veil.

Hypothetical:  Rosa’s Red Roses, LLC is owned by Rosa. The LLC only does wedding florals. Rosa then starts a new business, Floral Designs for Everyday, Inc. The corporation has classes on floral design to the public. Rosa pays all of the corporation’s bills through the LLC.

Analysis: If Floral Designs for Everyday, Inc. has a judgment against it, most likely, the Court will pierce the corporate veil because the corporation’s bills were paid, not by the corporation, but by the LLC. Therefore, the assets of the Rosa’s Red Roses, LLC will be subject to seizure, and Rosa’s personal assets will be subject to seizure to pay the judgment of Floral Designs for Everyday, Inc.

A court looks at several factors in determining whether to pierce the corporate veil. The factors are failure to follow corporate formalities, nonpayment of dividends, insolvency of debtor corporation at time of the transaction in question, insufficient capitalization, siphoning of funds by dominant shareholder, nonfunctioning officers and directors, absence of corporate records and existence of corporation as merely a façade for individual dealings. Piercing of corporate veils also applies to LLCs.

Courts look at the reality, how the entities operated and the individual defendant’s relationship to the operation. Veil piercing in an equitable remedy. Therefore, piercing of a corporate veil is not solely dependent on a party’s ownership interest in an entity.

One primary reason for a business to be set up as a legal entity rather than a sole proprietorship is to limit personal liability. However, when the formalities of the corporate existence are disregarded by the one seeking to hold the corporate veil, corporate existence cannot be used to shield the individual from liability for damages incurred by those dealing with the legal entity. In other words, the corporate veil cannot be used to shield the individual from liability when it benefits them and maintain the liability shield when it benefits them.

Spangler and de Stefano, PLLP assists business owners with limiting their liability.

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.