Starting a business of any kind carries risk. You stand to lose time, money, and other resources if it doesn’t work out. But with so much to lose, you want to minimize your potential for loss. Luckily, business owners/shareholders are not held personally responsible for the business’ liabilities and thus creditors are generally unable to seize a business owner’s personal property.
Owners are provided with protection by establishing their business as a separate legal entity, such as a limited liability company (LLC) or corporation. But while the personal assets of business owners are usually shielded, there are still exceptions. One such exception is known as “piercing the corporate veil.”
What is “Piercing the Corporate Veil?”
“Piercing the corporate veil” is a legal concept by which the court will disregard the aforementioned separation between a corporation and its owners/shareholders and allow creditors to be held personally liable for the debts of the corporation. In Virginia, piercing the corporate veil is only applied under specific circumstances.
Requirements for Piercing the Corporate Veil
In order to pierce the corporate veil in Virginia, a court generally requires evidence demonstrating that the corporation was 1) not operating as a separate legal entity; and 2) the owners or shareholders of the corporation were engaged in wrongful or fraudulent conduct, which would justify holding them personally liable.
Factors Related to Piercing the Corporate Veil
There are a variety of factors that the court may consider in determining whether to pierce the corporate veil in Virginia. Such factors include:
- Commingling of funds – The court will look at whether the corporation funds were mixed or kept separate from the owners/shareholders personal funds.
- Fraud or improper purpose – The court will look at whether the corporation was used to commit fraud or any other improper activities or if it only serves as a front for its owners’ or shareholders’ personal dealings.
- Failure to maintain corporate formalities – The court will look at whether or not the corporation observes corporate formalities, such as holding regular meetings, maintaining separate bank accounts, and maintaining proper records.
- Inadequate capitalization – The court will look at whether the corporation is adequately capitalized and whether it has sufficient funds to cover its liabilities.
If the court finds any or all of the above, it may choose to pierce the corporate veil and allow creditors to hold a business’ owners/shareholders personally liable.
Surovell Isaacs & Levy PLC Can Help Those in VA to Protect their Business and their Assets
It’s tough to run a successful business – especially as some things are out of your control. If you are being held personally liable for your business’ liabilities, it’s important to speak with a knowledgeable and experienced Virginia business attorney.
At Surovell Isaacs & Levy PLC, we have experience with corporate law and issues surrounding businesses. We will help you to protect your assets and fight for what it is that you deserve. To learn more or to schedule a consultation, contact us today!
Posted in: Business Law