Piercing the Corporate Veil: Is it Something to Worry About?

Many clients who have established a business as a corporation, or even better, as a limited liability company are worried that their creditors who obtain a judgment will be able to pierce the corporation and attack their personal assets. This creditor tactic is referred to as piercing the corporate veil.

In fact, under Florida law it is very difficult to pierce a corporation so long as the corporation operated as a distinct and separate entity. In Dania Jai-Alai Palace, Inc. v. Sykes,  the Florida Supreme Court established the standard to be applied in a piercing the corporate veil claim. The Court held that in order to pierce the corporate veil, a plaintiff is required to prove both that the corporation is a mere instrumentality or alter ego of the defendant and that the defendant engaged in “improper conduct.” Id. at 1120-21. The Court reasoned that the corporate veil should not be pierced unless it is shown that the corporation was organized or employed to mislead creditors or to work a fraud on them.

Just because the business owner does not update corporate records and minutes each year in a timely manner is not sufficient to pierce the corporation. In reality, the most prevalent reason for a corporation (or an LLC) not protecting people’s personal assets is that they operate the corporation as their “alter-ego” which means, most simply, that they pay personal expenses out of the corporation and withdraw money from the corporation as needed. The property practice is for your corporation to pay the owner and other employees a periodic salary and dividends (or in the case of an LLC, member distributions).

Also, maintain a separate corporate bank account and do not commingle personal money unless clearly documented as loans. In short, respect the separate existence of your business and do not treat the business checking account as your personal savings account or piggy bank. If you follow these simple guideline, a creditor is unlikely to defeat corporate asset protection under Florida law

Last updated on May 22, 2020

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